RegulationApr 28 2015

FSCS chief warns claims could exceed £100m levy cap

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FSCS chief warns claims could exceed £100m levy cap

A flood of complaints against defunct firms over advice to invest in unregulated schemes through self-invested pension wrappers is not just a problem for advisers, with the chief executive of the industry compensation scheme warning a £100m levy cap on intermediaries could be breached.

This morning (28 April) the Financial Services Compensation Scheme has announced life and pension advisers are to be hit with the maximum levy of £100m in 2015 to 2016, as a major surge in Sipp complaints continues to ramp up compensation costs.

Mark Neale, the organisation’s chief executive, has said the FSCS “cannot rule out” going over the levy cap. If this happened, costs would be attributed to the ‘retail pool’, which provides up to £790m of cover and is funded by providers and other intermediaries.

Mr Neale writes in the scheme’s outlook that it is “still early days in terms of volume and value of claims coming to us” about Sipps, adding that it was possible that costs in the year might be even higher.

“That means that we cannot rule out, at this stage, the possibility of the costs exceeding the maximum amount we can levy on life and pension intermediaries in any one year.

“That could lead to a levy on all firms in the retail pool. We will provide more information as the situation becomes clearer.”

The scheme also highlights one example of a Sipp claim it is compensating, in which the promoter of an overseas forestry investment was placed into administration after a claimant had transferred their personal pension plan.

Specifically, the FSCS says it ruled that fraud convictions did not break the “causal link between the bad pension transfer advice and losses suffered”.

Today’s levy increase is up 75 per cent from the compensations scheme’s January prediction of £57m and three times the £33m levy on the sector at the time of the annual levy last year. It also comes on top of a £20m interim levy in January, also related to Sipps claims.

In its report published today the FSCS gives a case study highlighting the kind of Sipp activity that had led to an increase in claims in its report.

It details that a person was contacted by an unauthorised introducer who convinced them to consider alternative investments to boost their pension funds, which were performing poorly. The introducer recommended transferring to a Sipp to invest into an unregulated forestry project.

“The “conservatively projected returns” were said to be 13 per cent in year one, 53 per cent in year two, and then 93 per cent in each of years three to five... the claimant was told they would be “able to sell your assets at any time.”

The introducer referred the claimant to a ‘specialist pension adviser’, whose completed a fact find and client agreement and recommended the claimant switch the personal pension plan.

A total of £30,000 was transferred to the Sipp, of which £26,000 was used to buy 809 trees in a plantation in Cambodia, with a £250 booking fee. Two years later the promoter was placed into administration.

Subsequently, the promoter was investigated by the Serious Fraud Office and four former officers charged with fraud, of whom three have been convicted. The investor’s holdings were written down by their Sipp provider to £1.

Following this, the claimant lodged a claim with the FSCS for unsuitable advice.

The FSCS was satisfied that the claimant had been badly advised, but took legal advice on whether the pension switching firm could reasonably have foreseen the possibility of failure of the investment scheme.

“Fraud may have broken the causal link between the bad pension transfer advice and losses suffered on collapse of the unregulated investment scheme. We decided that it had not.

“A hypothetical fund value obtained from the transferring pension provider showed a loss of £1,838.71 compared to the transfer value paid into the Sipp. Adding fees/charges and commissions incurred in the Sipp increased the loss to £5,107.18.

“The claimant will also receive £26,000 additional compensation as the pension switching adviser is liable for the investment losses too.”

ruth.gillbe@ft.com