The Financial Services Compensation Scheme has concerns about a growing number of claims for adviser to transfer from an occupational pension into a self invested personal pension, according to its latest annual report, published today (8 July).
In the 184-page FSCS annual report, Mark Neale, FSCS chief executive, said the scheme is dealing with “increasing volumes of claims relating to advice given to consumers to switch from conventional pensions to a Sipp”.
His comments come after the FCA warned back in April that advice to transfer assets into esoteric investments wrapped within Sipps is to come under a greater level of scrutiny.
The FCA stopped short of the ban it placed on recommending unregulated investments to most retail clients.
The FSCS has started to receive claims against firms such as TailorMade Independent Limited, which failed in October 2013.
According to Mr Neale, FSCS experience accords with concerns that the FCA has raised regarding the conduct of such firms and the potential for significant consumer detriment as a result of investors being encouraged to invest their pension funds in high-risk assets, many of which are illiquid.
The result of this advice is that investors cannot access their funds, the compensation scheme stated.
The FSCS has been establishing the liability of the firms involved in this business and the losses that can be attributed to them, however this can be complicated by the esoteric nature of many of the investments placed in Sipps, Mr Neale said.
Many of these assets are based overseas, Mr Neale said, and are subject to significant uncertainty as to their status, value or future.
Although the overall number of claims received by the FSCS is down this year, Mr Neale said the level of complexity of the investment cases the FSCS is having to handle has increased “considerably.”
Pointing to the failure of Catalyst in October 2013, Mr Neale said this highlighted the intricate demands arising from multiple products, difficult quantification issues, and the involvement of numerous third parties.
Catalyst offered bonds issued by a Luxembourg-based firm called Arm Asset Backed Securities SA, which itself was subject to insolvency proceedings in late 2013.
Catalyst had a key role in promoting funds backed by Arm, which had been suspended since 2011.
The bulk of the Catalyst claims will fall into the 2014 to 2015 financial year, the annual report warned, with virtually no cost implications for 2013 to 2014.
However, the FSCS warned it expects the compensation costs to run into tens of millions of pounds.
Where appropriate, Mr Neale confirmed what he said in a video interview with FTAdviser about his continued desire to take legal action through the courts to reclaim costs.
He said the FSCS has chased a “large number of IFA firms” for investors’ losses on products promoted by Keydata.
During 2013 to 2014, the FSCS recovered about £88m from investment failures, including Keydata.
According to Mr Neale, these recoveries either go back to the industry or, as in the case of the investment intermediation sector, are offset against compensation costs.
The compensation scheme managed to recover £353m from the estates of failed firms last year, including £241m from the major banking failures of 2008 to 2009.
