PensionsDec 16 2014

FCA demands ‘prudent’ valuation of troubled assets

twitter-iconfacebook-iconlinkedin-iconmail-iconprint-icon
Search supported by

Self-invested pension providers should place a ‘prudent’ valuation on troubled investments, the regulator has said, as several Sipp firms said they would value client investments at zero in a recent case under investigation by the Serious Fraud Office.

This follows on from last week’s news that three directors have been jailed for their part in a £23m fraud. The SFO’s criminal investigation focused on the selling and promotion of products based on “green biofuel” Jatropha tree plantations in Cambodia.

The SFO said: “These investors were deliberately misled into believing that SAE owned land in Cambodia, that the land was planted with Jatropha trees, and that there was an insurance policy in place to protect investors if the crops failed.”

The products were sold to UK investors primarily via self-invested personal pension plans. Two years ago, SGG’s management receiver Chantrey Vellacott confirmed to FTAdviser that 12 to 15 Sipp firms had allowed investments into SGG.

As a consequence of the fraud allegations that beset SGG, a number of Sipp providers spoken to by FTAdviser said they would value the investment at zero unless an independent valuation can be carried out.

Several raised the potential issues with applying a higher valuation, focusing on the potential detriment to a client if they believed there was more value in the Sipp than could ultimately be realised and took benefits accordingly.

A valuation to nil would affect the amount of income that a client could draw from their fund.

However, the issue raises again previous complaints with a new capital adequacy framework across the sector, as effectively no capital would need to be held against these assets despite the likely high costs of winding up the assets.

A spokesperson for the Financial Conduct Authority told FTAdviser: “The normal position on assets that can’t be valued is that firms must use their best endeavors to get a valuation [from an independent valuer] but if they cannot, they must use a prudent valuation.”

Martin Tilley, director of technical services at Dentons, said: “The valuation of this is totally in someone else’s control: you will need to send someone out there to get an independent formal valuation of what they’re worth for the Sipp provider to transact with the member. They can’t just wind it up.”

Claire Trott, head of technical support at Talbot and Muir, said: “If a fund is suspended we will currently record it with a zero value... [this] is the worst case scenario meaning we are not over valuing the Sipp, which could result in a client taking benefits that are too high.

“It would be difficult if not impossible to get a current value on a suspended fund, because assets are only worth what someone will pay for them and if you cannot deal in them, they really have little or no real value.

“Once resolved there may be a value which would go into the Sipp and reinstate some of the fund.”

Mark Smith, head of compliance at Mattioli Woods, added: “Sipp providers should put their own value on what they think it’s worth, however it’s really difficult in this position. It should be valued at nil as there is little else they can do.

“The impact on the level of income that can be drawn will be reduced in value so there are knock-on effects.”

Some firms also raised concerns over Sipp providers continuing to charge clients for simply holding the asset.

Ms Trott said: “It is not unusual for some providers to continue to demand their fees even if there is no value in the Sipp.

“This really isn’t practical so Sipps can be suspended if this is their only asset and then if something is received back then it can be reinstated. This is again where single asset Sipps are not ideal for a client because one mistake could wipe out the whole Sipp.

“It may also be impossible to re-register the asset to the new provider so it may be the case that it would need to be left behind, which again could mean that the client would continue to accrue charges.”

Mr Smith said: “Some providers may still charge fees for holding the asset and this is a big issue within the industry.”

Mr Tilly added that clients would be “in limbo” if they purchased the asset through an unregulated adviser, explaining that in this instance “Sipp providers can’t tell clients what to do as they can’t give advice”.

Last year, The Lifetime Sipp Company valued Harlequin property investments as £1, stating that it was adopting this approach “as an accurate valuation is not currently available”.

donia.o’loughlin@ft.com