SIPP providers urged to raise due diligence levels
Expert suggests industry could do more to prevent inappropriate assets in pension portfolios
SIPP providers are being called on to boost their due diligence processes in order to stem the tide of unsuitable investments their clients hold, a provider has warned.
Martin Tilley, director of technical services at Dentons, the SIPP provider, said the rise of esoteric investments in SIPP portfolios, like overseas hotel rooms, is a cause for concern because they might not be appropriate for investors.
“I don’t think a lot of SIPP providers have brought their due diligence to where it needs to be. A lot of these investments end up not doing what they are supposed to be doing,” he said, adding, “You’d be surprised a lot of firms are doing large quantities of business in these overseas property investments.”
Tilley even suggested a ‘code of practice’ might be needed so all SIPP providers follow the same procedures when it comes to allowable investments.
Overseas hotel investments, which are not regulated by the FSA, have attracted a great deal of scrutiny and criticism from the advisory profession. The schemes are advertised as offering attractive returns but in many cases also offer generous commission payments to advisers. They have been criticised for not being transparent and having liquidity issues..
However, Robert Graves, head of pensions technical services at Rowanmoor Pensions, said SIPP providers have limited powers to prevent certain assets being invested in SIPPs.
He said this included ensuring the asset is allowed under HMRC rules, that they can obtain good title if it is property, and that the pension trustees do not incur any liabilities by buying it.
If an investment passes all of the firm’s checks, the provider should not be able to deny it. “The role of the SIPP provider cannot be determining suitability for the underlying client,” Graves said.
Tilley said investors are drawn to these assets because they offer something that is missing from traditional financial markets, but in many cases they are the wrong choice for many investors.
“It’s a general unhappiness with how the markets have performed and how conventional assets have performed over the past four years,” he said, but added just because it looks like a good opportunity and the marketing literature sounds attractive, it does not mean it is appropriate for the investor.
Graves said there are times when SIPP providers need to be on top of any trends that might point to unscrupulous behaviour, saying his firm investigates any patterns that could be related to potential problems. But he added the regulators also have a role to play.
“What I would like to see is more information coming out of the likes of HMRC, the Serious Fraud Office, the Pensions Regulator and the FSA regarding where they see the real threats to clients and where SIPP providers could be focusing efforts to prevent client detriment,” he said.