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Martin Tilley: Alarm bells are sounding for Sipp industry

Its Dear CEO letter to providers shows the regulator expects future fallout within the industry

In comparison to the timescale of the pending judgment in Adams vs Carey Pensions, the Court of Appeal judgment in Berkeley Burke vs Financial Ombudsman Service went through at breakneck speed.

Although on face value the two cases cover similar principles, the underlying circumstances are different. This offers some hope to the Sipp industry as, if a further Berkeley Burke appeal fails, there are potentially dark days ahead.

Almost as if it had prior knowledge of the outcome, the FCA issued a Dear CEO letter to all Sipp operators the same day as the publication of the Court of Appeal judgment.

FCA probes Sipp providers for data in wake of Dear CEO letter

The letter requires Sipp operators to “consider the potential implications” of this judgment and other “pending civil claims in the High Court” on their business and subsequently on their customers.

It goes on to remind Sipp operators of their requirement to be able to meet financial commitments and collaborate with the regulator if it is felt they might not. Clearly, the FCA is expecting some future fallout within the industry. Nevertheless, what consideration does the FCA require? Its letter does make the point the case in question is pending an appeal and that other judgments need to be taken into account.

I suspect what it is looking for is evaluation of a worst-case scenario. Fortunately, Sipp providers should already have management information detailing the type of assets held. It would appear from the current court judgment that the client introduction is irrelevant – whether it is through a regulated intermediary, an unregulated introducer or a direct-to-Sipp operator case, since the focus is on the acceptance of the asset, not the source of the business.

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For all current assets, the Sipp operator must consider whether the potential for any liability exists.

For those assets, they must then assess what due diligence was undertaken and, in particular, the evidence that exists to prove the process that was followed. Only then can the Sipp operator take a view as to whether any liability might exist and, secondly, the likely scale of that liability. It is quite possible that, irrespective of fault, Sipp operators could be deluged with claims, and the documenting of and dealing with such claims will have a resource cost on a business.

For some, it seems likely the compound costs of these claims and liabilities could make the ongoing continuation of the business unsustainable. For these firms, a controlled exit from the market will be necessary, whether this is by sale, merger or enforced wind-up. The FCA’s letter also addresses this point and asks that due consideration should be given to consumer outcomes of any proposed exit.

It also requires the Sipp provider to communicate with the regulator at the earliest opportunity in an open and co-operative way.

Of those firms with limited or no liabilities, consideration will need to be given to whether their business model is sustainable in view of the heightened levels of due diligence necessary to avoid potential liabilities.

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Undoubtedly, revisions to due diligence processes will be necessary to ensure they are fit for purpose. The depth and type of process will vary, but additional costs will apply, which will have to be passed on to investors looking at any non-standard asset.

Quite possibly, the costs could see some providers step away from certain asset classes or indeed from the non-standard market altogether.

There has already been some evidence of this, possibly driven by the enhanced capital adequacy requirements introduced in 2016.

All of that said, there will remain some financially strong providers with robust due diligence processes that will endure, although they will be fewer in number than now.

The phrase “hindsight is a wonderful thing” makes me wonder if scrutiny after an asset failure may suggest that missed due diligence at the time might have been at fault. I wonder, then, where a due diligence process would ever end.

Martin Tilley is director of technical services at Dentons Pension Management


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There are 5 comments at the moment, we would love to hear your opinion too.

  1. “Almost as if it (FCA) had prior knowledge of the outcome”

    I think the only cohort that expected a different outcome was the SIPP industry (AMPS et al) – I’d suggest the rest of us working in regulated financial services have for a long time expected SIPP providers to come unstuck for their practices of allowing everything and anything to be held in a SIPP on the basis it was “SIPPable” and working closely with unauthorised individuals and firms in the process.
    It is hard to imagine why a regulated entity would believe they had no responsibility when (in some cases) they allowed over a thousand retail investors to put 100% of their pension savings into fractions of a hotel room in a resort off the coast of Somalia.
    As well as this, individual SIPP operators accepted several hundred DB transfers without any questions being asked about the appropriateness of swapping a guaranteed income for a hotel room. Can this really be defended by AMPS or anyone for that matter?

    • Chris, I’d certainly not attempt to defend the actions you’ve spelt out but to tar the whole SIPP industry (et al)is a little unjust. There have been and remain some very well run and diligent providers who are suffering as a result of every an any individual who has ever had an investment that has dropped in value now thinking they can submit a claim which must be defended. The article was attempting to look forward at what the future of the market might be. This I suspect will be fewer providers offering bland or more expensive non standard options that will cater only for the genuine sophisticated or high net worth investors.

  2. Good article, couple of minor points:

    “Almost as if it had prior knowledge of the outcome, the FCA issued a Dear CEO letter…”

    It almost certainly did, not unusual for the parties to be given a preliminary copy of the judgement prior to public hearing.

    Wasn’t Berkeley Burke in the High Court, not the Court of Appeal?

  3. Aren’t these Dear CEO letters about a decade (too) late? The sherbert’s already hit the fan.

  4. Well said Chris Bryans and let’s nit forget all the other daft investments SIPP providers waved through with little or no DD as well.

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