Advice to transfer assets into esoteric investments wrapped within self-invested pensions is to come under a greater level of scrutiny after the regulator issued an alert signalling a tough tone, but stopped short of the ban it placed on recommending unregulated investments to retail clients.
In the latest warning from the Financial Conduct Authority on non-mainstream Sipp investments, the watchdog said in general its supervisory work found “very poor standards of advice” and that it expected further referrals to its enforcement division.
The FCA said it has taken action to stop a “large number” of firms from operating such models and will “continue to do so”, citing the bans it handed down earlier this month against Andrew Rees and Timothy Hughes after they recommended 2,000 clients to transfer their pensions.
It said it was not looking to ban non-mainstream Sipp recommendations for retail investors in the way it has for unregulated collective investment schemes, stating they “have a right to have an authorised firm to act in their best interests”.
It has toughened its stance, however, as “the serious and ongoing failings found at firms have placed a substantial number of customers’ retirement savings at risk”.
In January last year, the regulator outlined its concerns that firms were advising on pension transfers or switches to Sipps without assessing the advantages and disadvantages for customers of the underlying investments.
The FCA has also issued specific alerts to advisers recommending clients to invest in Sipps heavily weighted to overseas property developer Harlequin, the UK sales arm of which has since entered administration.
Last year, The Lifetime Sipp Company valued Harlequin property investments within the Sipp as £1 “following discussions with our regulator”.
The FCA said it had carried out further supervisory work, including visiting some firms, to assess whether their business model complied with its requirements and it continued to identify “serious and ongoing failings”.
In the cases it has seen, customers’ existing arrangements were invariably traditional pension plans invested in mainstream funds or final salary schemes, with the customer generally having no experience of either standard or non-mainstream investment options.
The non-mainstream propositions, which were typically unregulated, high risk and highly illiquid investments, included overseas property developments, store pods and forestry. “Such transfers or switches are unlikely to be suitable for the vast majority of retail customers”, the FCA said.
The alert states: “Firms typically failed to carry out an adequate assessment of the customer’s overall financial position, needs, attitude to risk and objectives in relation to the switch or transfer as a whole.
“Advisers’ understanding of non-mainstream propositions was also typically very poor, at least in part because of inadequate due diligence on the products and on the product provider.”
The FCA also found some firms operated business models whereby all customers were treated as ‘insistent’ or seeking execution-only services.
These models were “clearly adopted in an attempt to avoid compliance” with suitability requirements, while exposing customers to a high risk of detriment, the regulator said.
It has also seen a number of firms adapting their business model to advise customers to take out small self-administered schemes “in an attempt to avoid FCA scrutiny”. However, advice to switch or transfer from pension arrangements is a regulated activity regardless of the funds’ destination.
Furthermore, the regulator found that many firms had inadequate PII cover in place or had failed to disclose to their insurers the true nature of their business model.
The FCA said: “Our work in this area is ongoing and, if you continue to operate in this area, you must have a robust and compliant advisory process in place to ensure you meet our requirements, acting at all times honestly, professionally and in accordance with the best interests of the customer.
“We anticipate further firms, and their senior management, being referred to our enforcement division.”
