While it is early days in the life of the FCA, and much has been heard of the FCA’s new approach to regulation and getting “maximum bang for [its] buck”, it is clear that the transition from the FSA to the FCA has not radically changed the watchdog’s enforcement priorities. The continued focus on unregulated collective investment schemes is an example of this, which is hardly surprising given the significant increase in sales of Ucis to retail consumers in recent years.
In June 2012, the FSA issued over 250 letters to retail intermediary and provider firms of Ucis investments to highlight its concerns and the key regulatory requirements that apply. Those letters also required the compliance officer of the addressee firms to attest compliance with the Ucis regulatory regime.
Such action was taken in light of the FSA’s findings that “ordinary” members of the public were being advised to invest in Ucis, often via their self-invested personal pension plans.
The FCA recently published its final rules governing the sale and promotion of Ucis (policy statement 13/3). The key enforcement message is that it “will continue to take steps to identify poor conduct in this market and will take strong action to protect consumers” where evidence of failure is found. Much of the recent noise from the FCA is that Sipp liability will continue to be in sharp focus. It remains unclear, however, how this focus will translate and manifest itself and, in particular, how the relationship between Sipps and IFAs will be dealt with in the context of complaints.
The FSA published two thematic reviews of Sipp providers, the first in November 2009 and the second in October 2012. Those reviews identified various key failings including, amongst others, inadequate risk monitoring, poor monitoring of non-standard investments and inadequate due diligence on investments held in a Sipp.
Action can therefore be expected here in line with the FCA’s credible deterrence policy, particularly given comments by director of enforcement and financial crime Tracey McDermott at a compliance and risk summit last month that the issue of Sipp liability would be under scrutiny as part of its “whole value chain” approach.
Although Sipp providers frequently do not give advice to individual investors, they are still responsible for ensuring that a quality service is provided and paying due regard to their clients’ interests, for example whether investments are appropriate for personal pension schemes, notwithstanding that an IFA may have advised in the first place.
A Sipp provider’s responsibility to undertake adequate due diligence on the investments held by their members to identify potential risks is therefore clear. It is not enough for a Sipp provider to rely on third party due diligence and the fact that those third parties, such as IFAs, have advised their clients to invest in Sipps.
In line with the FSA’s thematic reviews, the focus appears to be on procedures and controls which should enable Sipps “to identify possible instances of financial crime and consumer detriment such as unsuitable Sipps.”
Firms with weak and/or inadequate systems and controls to identify obvious potential instances of poor advice and/or potential financial crime can therefore expect to be in the firing line.
The relationship between Sipps and IFAs
So where is the line drawn between an IFA’s obligation to ensure an investment is suitable and a Sipp provider’s obligation to ensure an investment is appropriate?
This is unclear and untested but is clearly something that the FCA intends to focus on. According to McDermott they “will be looking very carefully and very hard at”.
Where the value of an investment has gone down for legitimate reasons (that is, it was a high risk product which naturally produced high returns and losses) rather than because the investment itself was inappropriate, and a complaint is based on suitability, this would appear to fall firmly at the feet of the adviser.
However, in instances where the investment was inappropriate in some way and this is not picked up by the Sipp provider due to, for example, inadequate due diligence then the Sipp provider could be considered liable.
The position would be similar where there has been no advice provided and the client invested directly. Further, where the focus is on the financial adviser there may still be room to argue that the Sipp provider shares some of the blame which could lead to a contribution claim.
However, in January this year the FSA issued an alert to IFAs on the issue of pension transfers which highlighted concerns that advisers had moved customers’ savings to Sipps investing in unregulated products, particularly Ucis.
The FSA’s view was “that the provision of suitable advice generally requires consideration of the other investments held by the customer or, when advice is given on a product which is a vehicle for investment in other products (such as SIPPs and other wrappers), consideration of the suitability of the overall proposition, that is, the wrapper and the expected underlying investments in unregulated schemes”.
In the case of clients who are advised to invest in Ucis through a Sipp, this suggests that the responsibility (and therefore the liability) lies primarily with the adviser.
Whether Sipp providers will be pursued by their clients in the event of loss where advice has been given by an IFA remains to be seen. Even if the Sipp provider is at fault, if the advice was unsuitable then the case against the IFA would be much clearer.
As a consequence, it appears that the bulk of Sipp providers’ exposure will relate to direct investment scenarios or where an IFA cannot meet a claim (that is, as a fall-back option). It is clear, however, that a Sipp provider’s obligations to a client will not be greater than a financial adviser’s. It is therefore unlikely that an adviser would be able to shift liability onto a Sipp provider.
Terence Dickens is an associate at Foot Anstey LLP