Sipps have been used as a vehicle for investment of a range of esoteric and unregulated investments, a number of which have suffered high profile failures.
In many cases, Paul Evans, pensions technical manager of Suffolk Life, notes investors have been persuaded to invest significant proportions or all of their pension funds in these types of assets, often without the involvement of a regulated financial adviser.
The claims for these investment losses have ultimately found their way to the Financial Ombudsman Service and the Financial Services Compensation Scheme.
Although these types of investments only make up a relatively small proportion of a Sipp market that now numbers well in excess of 1m investors, Mr Evans says the investment failures and subsequent claims have been widely reported.
Mr Evans says: “With Sipps used as the primary vehicle for these investments to access pension cash, they’ve become associated with the failed investments placed with them.
“Preventing further instances of this type of activity is one of the key drivers behind the FCA’s thematic reviews of Sipp operators and their subsequent insistence that Sipp operators introduce greater controls to prevent the problem becoming more widespread.
“Sipp providers affected by this type of activity typically have higher numbers of Sipps containing single investments, often unregulated.
“Advisers should ask open questions of their Sipp providers to ascertain the quality of their book, and providers with high proportions of single asset or unregulated investments in Sipps may represent a risk to their client that they’re not prepared to accept.”
As a result of these past failures in August 2014, the FCA penned its latest’ Dear CEO’ letter to all Sipp operators. In this the regulator highlighted the risks that it still believes exist within the market and highlighted examples of continued poor practice.
The regulator now expects Sipp operators to fully understand the investments allowed within their scheme.
In most instances that means undertaking similar or even higher level due diligence that an adviser would undertake before recommending an investment to their client.
The key points are:
• correctly establish and understand the nature of an investment;
• safeguard against potential scams, fraudulent activity, money-laundering or pension liberation;
• ensure that an investment is secure – custody of assets is through a reputable arrangement and any contractual agreements are correctly drawn-up and legally enforceable;
• establish whether an investment can be independently valued, both at point of purchase and subsequently; and
• ensure that an investment is not impaired, for example that previous investors have received income if expected, or that any investment providers are credit worthy, etc.
Sipp operators are not expected to vet the suitability of recommended investments for individual clients, but Paul Evans, pensions technical manager of Suffolk Life, points out they do have a responsibility to ensure that higher risk, esoteric investments, such as unregulated investments, are only accessed by experienced investors that fully understand the risks.
The responsibility of assessing if investments are suitable for individual clients remains with the adviser or with the investor themselves.
On top of the Dear CEO letter in August 2014 the FCA set out a revised set of Sipp capital adequacy rules, requiring firms to calculate their capital requirements in relation to assets under administration, with an additional capital surcharge for the value of ‘non-standard’ assets that they administer.
Standard assets are defined as being readily realised within 30 days.
However the FCA proposed a range of amendments in a consultation launched in June with the intention to reduce the compliance costs for Sipp operators while retaining the original principles of consumer protection and market integrity.
The regulator proposes simplifying the calculation of the capital requirement. Providers will no longer need to obtain accurate quarterly valuations of all AUA.
Instead they will be expected to use the sum of the most recent annual valuations of the plans over the preceding 12 months, adjusted to include any revaluation of assets that may occur between the date of the most recent valuation and the date AUA is calculated.
In addition, the latest proposals give firms six months to raise further capital where increases in the AUA result in a higher capital requirement.
The FCA has also updated the standard asset list. Previously the list only included shares traded on Aim and the London Stock Exchange, replaced by a new definition of securities trading on regulated exchanges (which also includes bonds).
Bank deposits have been changed to deposits to incorporate building society or credit union deposits into the standard definition as the FCA expects that most deposits should meet the ‘readily realisable’ requirement, even if a penalty is applied.
Commercial property remains classified as a standard asset, unless the Sipp operator expects that a property cannot be realised in 30 days.
According to Suffolk Life’s Mr Evans, provider interpretation of these new rules may now lead to different levels of protection for investors and their assets.
