Interest taken by self invested pension providers from client cash accounts could be the next mis-selling scandal, Sipp provider Liberty has told FTAdviser, following the revelation on this website yesterday (25 April) that the practice accounts for up to 40 per cent of interest for some firms.
The firm said the practice has been commonplace “for years” and warned that should this turn sour the claims for compensation could run into “hundreds of millions” of pounds.
FTAdviser revealed yesterday that Sipp providers are either taking a percentage, or all, of the interest paid on their clients’ mandated current accounts.
John Moret, principal of consultancy business MoretoSipps, said data produced by the firm shows six providers produce more than 10 per cent of their revenue from withheld interest on client cash accounts, with the figure at one firm standing at 40 per cent.
Separate data from FTAdviser sister title Money Management reveal that 55 out of 70 providers responding to its major bi-annual survey - 78 per cent - offer a bank rate of less than the current base interest rate. Some 25 firms offer a rate of zero per cent.
Client cash accounts are used to receive income from any investments and also to make external payments.
Liberty told FTAdviser that even where these current account commissions have been disclosed to customers, often this has happened only in the small print, creating a case for potential mis-selling.
John Fox, managing director at Liberty Sipp, said: “There is a growing awareness among Sipp investors that their provider may not have been fully transparent with them in relation to current account fees.
“In fact, I would be astonished if more than a tiny percentage of clients knew that they were paying these fees at all. It would take only one smart client or lawyer to push for some kind of recompense and we would potentially have another mis-selling scandal on our hands.
“Thankfully, from now on the new disclosure rules should make it far clearer to consumers.”
However, Mr Moret told FTAdviser that the regulator has not been prescriptive enough in its new disclosure rules and suggested that firms could still find “disingenuous” ways of obfuscating the amount of interest they retain.
Phillip Bray, marketing manager for Nottingham-based Sipp specialist Investment Sense, said until there is a ruling to prevent the practice altogether he advised investors to avoid being hit by keep money outside of the cash account offered within the wrapper.
He said: “I’d like to see Sipp providers take no interest whatsoever. After all, the interest rightfully belongs to the member. However, any move to ban the practice could lead to higher Sipp fees.
“Keep as little money as possible in the mandated Sipp account and move any spare capital to other deposit accounts, which pay a higher rate of interest.”