Mike Morrison: Where does the buck stop on Sipp investments?


The Sipp regulatory regime is back on the table in the year of its 25th anniversary. The perennial question is: who exactly is responsible for what?

Sipps were brought under the regulatory microscope in 2007 and what was then the FSA undertook a thematic review in 2009. It concluded at the time “when taken as whole, Sipp operators did not pose a significant risk to our statutory objectives”.

However, in 2011, the regulator’s tune began to change and it warned of “poor firm conduct and the potential for significant consumer detriment”. It also found “inadequate controls over the investments held within some Sipps”.

Three years later, in 2014, we saw complaints data double. Evidence from the Financial Ombudsman Service showed almost three quarters of those complaints were about “advice” to invest into unregulated and unsuitable investments. The FCA confirmed it had told several Sipp operators to stop supporting non-mainstream investments.

In April of that year, the regulator issued an alert confirming “some firms continue to operate a model where they purportedly restrict their advice to the merits of the Sipp wrapper. We think advising on the suitability of a pension transfer or switch cannot be reasonably done without considering both the customer’s existing pension arrangement and the underlying investments intended to be held within the Sipp”.

Since then we have witnessed a couple of key legal developments.

Firstly, in July 2014, we had the FOS decision against Berkeley Burke, which ruled that the trustee of the Sipp had a duty to ensure the investment was suitable for the underlying member where there was no authorised adviser or perhaps even a non-regulated introducer.

This judgement was referred to as a “game changer” by one firm of lawyers but it was subsequently removed from the FOS website for a formal review and has not been seen since.

In April of this year, a decision from the Pension Ombudsman took a different view.

It ruled that the Sipp operator complied with its obligations and gave the investor clear warnings when the Sipp was opened in 2011. At the time, the investor had signed a letter from the Sipp operator, which stated it would not be held responsible for any losses or liabilities that might arise from his investment decisions and that there was no implied suitability of the investment with reference to his financial objectives and risk profile.

The investor’s complaint was that Berkeley Burke failed to carry out due diligence into his investments, even though he had chosen them himself.

Not unsurprisingly, with two ombudsmen and two different decisions, the legal argument has turned to jurisdiction and which ombudsman should deal with such complaints.

I have also seen reports that a law firm has written to the FCA arguing that Sipp providers should be held fully accountable where an investor has either had no advice or has had contact with an unregulated “introducer” pushing them towards unregulated products.

It also suggests that some Sipp operators have been “actively promoting and facilitating” such arrangements and that “providers that close their eyes and ears to a clueless and vulnerable investor investing on representation of an unregulated introducer are to be condemned just as much as the introducer who promoted the investment… Our clients are vulnerable people who have no or very little knowledge of financial services. Bluntly, they have been exploited”.

I am not sure I totally agree with this. The relationship between Sipp operator and investor has always sat awkwardly on a combination of trust law and contract law. Perhaps you could argue that Sipp operators ought to walk away from investments they feel should not be held.

For me, the advice relationship is key: there is either regulated advice or no advice at all. We also have another non-regulated introduction, which can influence an investor’s decision but is clearly not advice.

The growth of DIY investment and D2C Sipps means more people are making their own investment decisions. While there is absolutely nothing wrong with this, we must be wary of making providers responsible for everything all the time.

It is without question Sipp providers should monitor and bear some responsibility for the quality of business introduced to them, by who, why and at what frequency. However, I do not believe they should have to see copies of suitability reports or get involved with individual suitability.

I guess my point is to make a revised call for a permitted investment list. If we had a definitive list of what Sipps could invest in or not then perhaps we could create some certainty for providers, advisers and clients alike. The imminent capital adequacy legislation and its introduction of standard and non-standard investments would be a good opportunity to do this.

Mike Morrison is head of platform marketing at AJ Bell