The regulator needs to provide clarity over who is responsible for Sipp investment failures, experts have said.
The line between adviser and Sipp provider responsibility is “blurry” and the FCA needs to be more “robust”, industry insiders have said.
The call to action comes ahead of a ban on cold-callers who get people to invest their pensions in unregulated schemes. Figures from the Government this month showed that almost 3,000 savers have been conned out of an average of £15,000 each in the past three years.
But Dentons director of technical services Martin Tilley thinks the situation is improving and many Sipp providers are now shunning so-called toxic assets.
He says: “There a shift occurring. A few years ago, the Ombudsman tended to absolve Sipp providers in cases where toxic assets had gone wrong. Now they are having to do more due diligence not just on the investments but the source from which they are coming, and do more to ensure they are treating customers fairly.”
While the watchdog is cracking down on unregulated investments, there are still question marks over where the responsibility lies when an investment goes wrong.
Purle Consulting regulatory consultant Jonathan Purle says: “In Gibraltar, for example, the regulator is adamant that it is the job of the Sipp provider to do due diligence on an investment to see if it is suitable for retail investors. I think the UK could benefit from the same sort of clarity.”
A major issue is that Sipp providers frequently have little information about the investor, so are not able to offer guidance on whether a particular investment is appropriate or not. Particularly when the business comes through an adviser, there is an assumption that the IFA will have done the due diligence on investment suitability, and the Sipp simply needs to confirm that it is eligible for the wrapper.
Yellowtail Financial Planning director Dennis Hall thinks the onus is on advisers: “The person providing the advice has the bulk of the responsibility. Sipp providers have their list of assets which they’re comfortable accepting but other than that they are just the administrator, which is right because if they’re not being paid for advice it’s unfair to expect them to provide it.”
Chartered financial planner
While Sipps are really just a tax wrapper and generally whatever is within them is under the direction of the adviser, the responsibility does fall to both parties. Sipp providers have a duty to consider whether an investment should be flagged for potential mis-selling.
The burden of responsibility is a grey area which has been thrown into the spotlight in recent years after some high profile mis-selling cases which appear to have left even the regulators confused on the matter. In 2015, the Financial Ombudsman Service ruled Sipp provider Berkeley Burke as responsible for investors’ losses from unregulated investment schemes, contradicting the Pension Ombudsman’s conclusion.
More recently, the FOS is still investigating complaints made against Carey Pensions concerning whether the firm carried out appropriate due diligence on an unregulated introducer.
Working towards a white list?
Some industry experts have suggested that the regulator should construct an explicit list of allowable and non-allowable assets for Sipps, just as there are for Isas, to help tackle the issue. Tilley disagrees though.
He says: “I think the people trying to sell these assets will just wrap them up into an asset that is eligible and then you will have a problem with them marketing products as Sipp-acceptable, as though it is an endorsement of the investment.”
But he thinks the industry is starting to clean itself up. Already providers such as James Hay have said they will no longer accept non-standard assets on to their books, and most providers have a list of investments they do and do not accept. The increased focus on the industry has meant many providers are taking steps to make their processes more robust rather than risk the regulator’s wrath in the future.
Hall thinks this approach could be over-cautious. He says: “It seems like some firms are looking to cover their backs by doing more than required, in case there are problems years down the line. If any of my clients were questioned by a Sipp provider as to their investments I would suggest it wasn’t allocating its resources very well.”
However, Tilley argues that providers need to protect themselves against future regulation: “We have never had a stronger process than we do now and we’re continually refining it so that we’re only accepting assets we want to hold. We don’t want to take on anything that could cause problems in the future, because we will have to suffer the burden if we do.”
Yet there are still risks with taking a cautious approach. Purle says those which take a more conservative line on the investments they accept could stand to lose out.
He explains: “An adviser or an introducer can always take their business elsewhere if a provider won’t take it. Because there isn’t a great deal of clarity from the regulator, those providers trying to be robust could lose business.”
The way forward
But taking a tough stance line today does not erase the mistakes of the past; the industry is still suffering a hangover from legacy business, which means there could be more complaints to come. Many of the major problems arose around the time of pensions simplification and in the handover of regulation of the industry from HM Revenue & Customs to what was then the Financial Services Authority.
The use of unregulated introducers is one particularly murky area that has emerged recently and could play out further down the line. The FCA has warned that Sipp providers may have to cover the costs of client claims if they can’t prove they did sufficient due diligence on the source of the investment.
Purle says: “The real question is whether the Sipp provider should have accepted the business in the first place. The law says that authorised firms shouldn’t be concluding a contract with an unauthorised intermediary.”
He adds: “There are vagaries as to exactly a Sipp provider’s responsibilities are. Any authorised firm has to act professionally and in its client’s best interests but where does it say that a Sipp provider should be responsible for double-checking the suitability of an investment? It’s ambiguous and that’s quite unfair.”