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Counting the £260m cost of Sipp misselling

Shadow of a hand and human figures, computer illustration.

The pensions industry is calling for fundamental reform of how Sipps are regulated as advisers face the prospect of another substantial Financial Services Compensation Scheme interim levy.

Sipp firms believe restricting what investments can be held in Sipps and introducing more flexibility in occu-pational pension schemes could help reduce the burden of claims falling on the lifeboat fund.

Life and pensions advisers were warned last week they may have to stump up an additional levy after the FSCS admitted it has underestimated the “velocity of growth” of Sipp-related claims.

FSCS chief executive Mark Neale has estimated the FSCS is facing a year-end deficit of £28m.

He said: “If that estimate is borne out by claims volumes in the remainder of 2016, we will have to raise a supplementary levy again. And because life and pensions advisers have already paid a levy of £90m this year against an annual limit of £100m, there is the possibility that a supplementary levy will trigger a cross-subsidy.”

An extra levy heaped on advisers has been branded “unfair” given a small number of firms are driving most of the claims.

Money Marketing has sought to find out what can be done to curb the Sipp missellling surge. Has the industry now reached the peak for Sipp claims or is there more fallout to come?

Crunching the numbers

In its interim report, the FSCS shed some light on the extent of Sipp misselling.

The number of Sipp-related claims has increased by 59 per cent this year, with total compensation for 2016/17 estimated at over £136m plus administration costs of £7m.

The lifeboat scheme said it “underestimated” the flood of Sipp claims, which has led to the warning it will most likely have to impose an interim levy on life and pension advisers next year. That warning follows a £20m interim levy for the fee block in March 2015.

In 2014/15 the FSCS paid out £19.4m in compensation on 1,142 Sipp-related claims. That increased to £77m in Sipp-claim compensation in 2015/16.


Since 2014 the FSCS – funded through life and pension advisers’ levies – has paid out £259.4m in compensation related to Sipp claims.

According to the FSCS, despite it receiving claims against 171 firms, just four firms were responsible for 73 per cent of the £136m compensation bill in 2016/17.

Those firms are 1 Stop Financial Management, Tailormade Independent, Total Wealth Management and HD Administrators. In November Money Marketing revealed the FSCS had paid out about £2.8m on 94 claims in connection with collapsed property investment firm Arck, which invested clients’ pensions through HD Administrators.

Up to September the FSCS had upheld 919 claims of unsuitable advice against Tailormade, with compensation of more than £40m paid to date.

The FSCS declared Total Wealth Management in default in May 2015 and 1 Stop Financial Management in July 2014.

Recent Financial Ombudsman Service data also shows an increase in complaints about Sipps. Between July and September the FOS received 435 Sipp enquiries, a slight increase on the 427 it received between April and June. Of the enquiries received it took on 321 new cases and 95 of those were passed to an ombudsman.

The FSCS says Sipp-related claims mostly relate to pension transfer advice. The investments the funds are moved to are usually high-risk, non-standard investments such as overseas property and palm oil plantations.

Suffolk Life communications and insight head Greg Kingston argues the fact that claims stem from bad investment advice rather than being related to the Sipp is an important distinction.

He says: “When I saw the FSCS figures the thing that struck me immediately was it was published as Sipp claims. That is probably misleading and it is frustrating because some of the better-quality providers in the marketplace continue to be tarnished by this.

“These are not Sipp claims – everybody knows what happened with all of these clients. They are really investment claims, the Sipp is a side issue that was set up to allow the sale of these investments.”

The fact that most claims have come from a handful of advisers is also likely to be reflected in provider practice. Kingston says a small number of Sipp providers will be allowing the high-risk assets into their wrappers.


He says: “Most Sipp providers will have an investment committee that will decide what sort of investments they will allow in their Sipps within the parameters of HM Revenue & Customs rules. It is generally accepted that the better end of the market would not allow these investments at all. That is why the suspicion is these investments are concentrated in a small number of providers at the lower end of the market.”

Peak claims

The FSCS has hinted it does not know the scale of future Sipp liabilities. In its half-year outlook it said: “The problem of bad advice about the investment of retirement savings is spread across many more than just four firms and we cannot easily foresee what the eventual volume of claims against these firms will prove to be.”

Altus Consulting senior consultant Jon Dean is hopeful claims have reached their peak and says the high level of consolidation in the Sipp market spells good news for a decline in claims.

He says: “A lot of those smaller players could well have been the ones that did not deal so much in terms of platform assets and, being smaller firms, they are less well resourced to do the due diligence on the underlying investments. The rate of new claims ought to start diminishing.”

However, the low interest rate, low yield environment means investors still have an appetite for riskier products in the hope they can boost returns. Added to this, some commentators believe future Sipp-related claims have yet to be referred to the FOS, which means they are some way off potentially burdening the FSCS.

With many of the issues stemming from transfers, calls have been made for better regulation of occupational pension schemes to introduce more flexibility in line with pension freedoms.

KPMG partner David Fairs says: “With freedom and choice you have got the ability for people to access their pots more flexibly but, unfortunately, a way that freedom and choice has been implemented is there are relatively few occupational schemes that allow flexibility directly from the scheme.”

Fairs argues occupational schemes are put off by the risk and additional cost of allowing people more flexibility, which is leading to people being advised towards Sipps.

He says: “[Sipps] naturally have higher costs because of the flexibility that is inherent. It may be the case that some people with fairly modest savings should actually take a transfer to a personal pension that does not have all of the flexibility around self-invested assets because they want to take advantage of freedom and choice. Some of this is advisers understanding their clients better. Some of it is if something could be done around regulation of occupational pension schemes to offer freedom and choice both economically and with lower risk.”

The Sipp provider is now doing a lot more due diligence and evidencing what they are doing and there are cost implications of that

Dean agrees giving pension trusts more power to deny or question transfers could help to stop investors falling foul of transferring to bad investments.

The Government has launched a consultation on giving pension schemes powers to block transfers if the receiving scheme is not operated by an FCA authorised firm, if the individual does not receive any income from the sponsoring employer of the receiving scheme or if the receiving scheme is not an authorised master trust.

However, Dean notes a High Court decision in February found that a Royal London customer did have a right to transfer pension funds to a SSAS that Royal London suspected of being a scam.

Sipp providers must meet some due diligence requirements imposed by the regulator, and Dentons Pension Management pension technical services director Martin Tilley says this is having a positive impact for the majority of providers.

Tilley says: “A Sipp provider now has responsibility for the assets it accepts in its book. It has to take into account all manner of things as to whether it is happy to take certain asset classes. It can make its own rules about what it will and won’t accept. That is why you have different Sipp providers that will take a different attitude and accept different assets.

“The Sipp provider is now doing a lot more due diligence and eviden-cing what they are doing and there are cost implications of doing that.”

However, Dean says many Sipp claims result from unregulated assets, limiting how effective new rules can be.

He says: “For the unregulated assets, what we are seeing is quite a lot of assets being transferred off-platform. Platforms tend to have processes that do due diligence on assets and they have ultimate power as to whether they will accept an asset onto the platform or not. The sort of schemes the FSCS is talking about in terms of overseas hotel chains and palm oil plantations are not platform assets and they are not regulated. Perhaps consumers are just not understanding that is the case.”

Expert view


In its half-yearly update, the Financial Services Compensation said the majority of claims in relation to Sipps are about advice to invest in non-standard assets such as hotel rooms in Caribbean holiday resorts, storage pods and plantations of oil producing trees in Asia.

The detail of these investments is telling and gets straight to the heart of the issue.  They are investments that have been allowed in a minority of Sipps following advice from a small minority of advisers. Unfortunately the “too good to be true” nature of the investments turned out to be exactly that.

These cases cost the industry both in financial and reputation terms. At a practical level they increase the levy all advisers have to pay when the vast majority would not go anywhere near these kinds of investments.

It is not surprising when we spoke to advisers, a significant majority (78 per cent) were in favour of a risk-based FSCS levy, where those who transact the riskiest business bear the heaviest burden in funding the lifeboat scheme.

This is something already being considered as part of the Financial Advice Market Review and a move to a “polluter pays” system could avoid the industry being penalised by the actions of a small minority.  The consultation has been delayed but is due before Christmas.

Another measure that would go a long way to resolving this issue would be to reintroduce a permitted investments list for Sipps.  This existed before pensions simplification in 2006. Reinstating it would be a simple way of limiting investments of the kind that lie at the heart of most misselling claims.

It would also have the knock-on benefit of making it harder for pension fraudsters to succeed with scams based around investments that entice people with high returns that rarely materialise.

The FSCS levy is already a heavy burden on advisers. A further increase to pay for the actions of a small minority of investments in obscure schemes feels unfair and should be avoidable.

Gareth James is technical resources head at AJ Bell



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There are 17 comments at the moment, we would love to hear your opinion too.

  1. Victim of dodgy claims 8th December 2016 at 9:18 am

    Product levy required on all financial products across the industry.and then re-shape the FSCS.

  2. The bottom line is a lack of effective regulation. The length of time it takes the regulator to react to whistleblowers is measured in years – you may find that hard to believe, but that’s the way it is – so the people behind these investments have all the time in the world to do what they do, while the losses scream upwards and the bill is apportioned amongst those who are trying to run decent businesses.

    I can’t be the only one who thinks the model isn’t working and that the FCA should be held to account for creating this mess and standing casually aside when they should be trying to stop the bad guys. The worst part of it all, from first-hand experience, is that they really don’t care about the investors at the end of the chain.

    We need to start again with regulators who get it and actually give a damn.

  3. Fed up of dodgy sales 8th December 2016 at 9:43 am

    Fed up of dodgy sales of unregulated investments whilst those who sell them become millionaires then dump their companies and their liabilities on the ones who make a living by giving proper advice to their clients and adhering to the rules. This has got to stop!

  4. Whilst I agree with the comment that this is not a “Sipp Problem” , I don’t agree that it is purely about poor advice. There is also an element of Due Diligence that must become more robust – both on the part of ceding schemes, and the recipient SIPP administrators. My sense is that the trustees and administrators of ceding schemes need to ask more questions to satisfy themselves about the bona fides and appropriateness of transfers. There should also be much more dialogue between the FCA, FOS and FSCS – it is a real concern that 73% of the £136m claims in 2016/17 relate to just four firms. It ought to be possible for the regulatory bodies to flag concerns to each other, and ring alarm bells for the industry as a whole. More due diligence, and more warnings would serve to protect consumers in the long run.

  5. Actually this is only the tip of the SIPP mis-selling iceberg. On only concentrating on flaky investments the Regulator seems to have overlooked people being shoved into SIPPS unnecessarily. If the portfolio only consists of OEICS and UTs there is absolutely no need to go for the extra expense of a SIPP. For example OM has what they call the Collective Retirement Account, which to all intenrts and purposes is just untit trusts and OEICS available on their platform, but without a SIPP wrapper and the extra expense associated with that.

    Indeed other platforms have siimilar and even the old pension funds may well work out cheaper.

    If a SIPP is the option then it should be used as such with perhaps a heavy preponderance of Investments Trusts, direct equities, ETFs and such like.

  6. I do not understand why as a regulated company we have to pick up the tab for unregulated products failing.
    I also think I might take a gamble with my pension pot into one of these dodgy schemes, you cannot lose can you? If the investment goes up you win if the investment goes down you claim your money back!
    Surely at some stage investors are going to have to take some responsibility for their greed. Generally in life ” If it looks too good to be true it is too good to be true”

    • David whilst any normal human would agree with you we are dealing with Regulators whose main purpose is supposed to be consumer protection. They have to find a way to blame advisers (and not the greedy public) and so they get us to pay by saying it is the advice which is regulated so cough up via FSCS. It is a sad fact of life that we currently have to deal with as the FCA couldn’t give a toss over the effect it has on advisers and consumers. They just put their fees up and the FSCS do likewise with their levies. Disgusting as it may be we can do nothing about it under the rules which exist

  7. As others have pointed out many times, the problem isn’t SIPPs, it’s the dodgy investments into which investors have been recommended to invest via SIPPs. If used purely for appropriate and properly researched investments, SIPPs may well be suitable for many people, though mainly sophisticated investors with the appetite and knowledge to go off-psite. That said, as HK points out, most people don’t need a SIPP anyway.

    • I agree with your wording on use of SIPP here Julian (especially “most peope don’t need a SIPP anyway”)
      All SIPPs should be logged and go on the Gabriel reports so the FCA can then do ARROW visits to identify WHY they needed a SIPP when what they hold in it could be in a PPP in most cases and even worse sometimes with some could have been in a SPP too!
      Best thing they could do would be ditch the stakeholder legislation now as it has failed and then spend time policing the innappropriate use of SIPPs as there are two ends being used inapproproiately, unnecessary for a SIPP and inappropriate and only way to get it in is via a SIPP!

  8. Martin Martin is so right. How many of these dodgy things are investments which shoudl never have happened in the first place and yet the innocent, honest and ethical advisers pick up the tad for intransigent regulation, effectively. The FCA does not need to have £50milion’s worth of cases before it brings a prosecution. It can say to the ‘firm’ as soon as the first case is reported (airport carparking spaces, rare earth materials, offshore property scams or whatever) that the entuity must desist immediately form promoting and accepting investments unless it can prove the protections are in place – in other words, to regulate by default. It has the power to shut-down companies – it should use it and protect people before they lose money, not waste so much warning people to be vigilant of things they could have stopped already.

  9. Is the Captain asleep at the helm YET again and we are supposed to be the bad guys? Tut tut Mr regulator FAILED YET AGAIN

  10. @Martin Martin is correct. At what point does something like this change from being a few rogues to being a systemic issue. It is reasonable to say that at these levels of poor behaviour (and projected to get worse) it is systemic. Who is responsible for addressing systemic regulatory issues? The FCA. If they took firm and timely action (including the publication of unambiguous and clear guidance) when the issues first arose then this could at least stand a chance of being avoided. But where’s the incentive? As the current regulatory structure stands it riskier for the FCA and its senior managers to do something and get it wrong than it is to do nothing and blame the perpetrators when it does. Clients? Secondary to all the other vested interests.

    As an example of this in practice, back in late 2003/2004 I had several conversations with the FSA about the problems around the sale of PPI. They were categorically aware of the issues then, possibly before. Remind me again of when it all hit the fan…? How many clients were compromised by a lack of decisive action in the intervening period?

    This article and, just as importantly, the comments, illustrate that nothing has changed other than the name, FSA to FCA. If advisers and journalists are aware of the issues why isn’t the regulator? If it is aware, where is the decisive and immediate action to correct the situation? I doubt SIPPs are the only potential ongoing regulatory failure. Ask some good advisers and they could probably tell you the rest.

    There are five monkeys in a tree and four decide to jump down so how many are left? The answer is five. Because deciding and doing are completely different things… just like intentions and actions.

  11. Many of the unsuitable SIPP investments that went to loss were created by unauthorised advisers who sold the investment to the SIPP member long after the original authorised adviser gave the original advice. However, the FCA, the FOS and the FSCS only pursue the original adviser, leaving the unsuthorised, unregulated adviser to keep his fat commission and escape from liability.

  12. Elsewhere, the FCA has been quoted as saying that ” the [GABRIEL] data allows it to spot trends in individual firms and in the market as a whole – to identify the firms to which we should allocate supervisory attention”.

    Whilst the GABRIEL data may, in theory, “allow” the FCA to do these things, it’s patently obvious that, in practice, it doesn’t actually do so ~ its catastrophic failures (for which, as usual, no one has been held to account) in respect of the likes of ArcK, ArchCru, Harlequin, Connaught and others all prove this. It doesn’t even demand proof of proper PII cover for selling off-piste investments.

  13. A UCIS is a retail investment contract that all IFA’s are authorised to advise on BUT they are very high risk. So the fact that advisers have advised High risk investments is not the fault of the SIPP

    BUT it is the fault of the FCA

    They are the ones who supposedly regulate our industry and I cant believe that today with all the regulations we have to put up with that there are lots of advisers out there who advise clients to transfer out of occupational defined benefit schemes into UCIS ??? and their compliance dept let them do it

    What is the regulator doing about it ? answer nothing

    how many of these idiots are still authorised to do business ? probably all of them

  14. It is about time that the FCA focussed on the outputs and stopped trying to set the inputs. The solution is quite simple but the arrogance of the FCA in refusing to address this issue is quite appalling and depressing.

  15. Can somebody enlighten me as to how the FSCS levy is apportioned to Advisors please

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