PensionsJul 21 2014

‘Shocking’ findings in Sipps thematic review

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The outcome of the regulator’s third thematic review into self invested personal pensions is concerning and will have consequences in the market, Sipp providers say.

Today, (21 July), the Financial Conduct Authority wrote to bosses of Sipp firms warning that Sipp operators are still failing to manage risks and ensure customers are protected appropriately.

In October, the FCA launched a third thematic review of Sipp operators, focusing on the due diligence procedures Sipp operators used to assess non-standard investments, and how well firms were adhering to the relevant prudential rules.

During the review, the FCA found that a “significant number” of Sipp operators were still failing to manage these risks and ensure consumers are protected appropriately, despite recent guidance.

The failings identified put UK consumers’ pension savings at “considerable risk”, particularly from scams and pension fraud, the FCA said.

Market commentators have called the findings shocking and concerning.

Neil MacGillivray, chairman of the Association of Member-Directed Pension Schemes, said: “The outcomes from the FCA’s third thematic review are of concern.

“The key issues are the level of due diligence on non-standard investments and how well firms are adhering to the prudential rules. Amps will be working closely with the FCA in pursuit of better guidance for our members.”

Claire Trott, head of technical support at Talbot and Muir said: “It is shocking that the FCA has been forced to write to Sipp chief executives to once again highlight the failings that have been found as part of the thematic review.

“As a Sipp provider who takes its responsibility to its advisers and clients very seriously, we have increased and continue to increase our management information so we can monitor and manage our business, including the Sipp investments, ever more effectively.

“We operate a strict permitted investment list to ensure that the investments made within our Sipp are suitable pension investments.”

Martin Tilley, director of technical services at Dentons, said: “The letter includes few surprises and outlines concerns that had already been aired about some Sipp operators failings of due diligence.

“One surprise that was included was the statement that the ‘thematic review found that most Sipp operators failed to undertake adequate due diligence on high risk, speculative and non standard investments’.

“Our view had been that most of the bespoke Sipp operators were doing a prudent good job and that it had a been ‘a few ruining it for the many’.

“The letter emphasises particular areas that the Sipp operator should be mindful of which revolve around understanding the investment, ensuring good title, valuation needs and ability to dispose of, but does not mention suitability, which appears to confirm that the suitability issue remains in the domain of the adviser or client themselves.”

He added that the thematic review requirements will have consequences to the market in that those firms who have and can continue to demonstrate expertise in the non-standard investment area and who as a result might not have been the cheapest will continue to operate in this market and those that have not or cannot will exit it.

Mr Tilley said: “Clearly the resources required to undertake the required due diligence are substantial and costs to access these investments may well increase.

“There will be a polarisation of the market into Sipps that can and Sipps that can’t, and IFAs will need to be aware for their clients who may at some point need these investment capabilities for their clients because as has been demonstrated, switching Sipp providers is a time consuming and often costly exercise.

“The review might also be one of the catalysts to consolidation in the market, although depending upon the capital adequacy rules to be issued next month, the potential acquirers will need to take into account the potential liability of acquiring other Sipp firms who have not made the FCA’s required standards previously.”

Andy Leggett, head of Sipp business development at Barnett Waddingham, said that the ‘dear CEO’ letter provokes “mixed feelings”.

He said: “Negative publicity for Sipps – a pension success story – inevitably induces dismay. Although the criticism in this paper is more discriminating than in the second thematic review, which tarred the whole industry, many companies will feel it does not describe their operations yet leaves them questioning whether it is ever worth accepting non-standard investments whatever the amount of due diligence that has been conducted.

“The emphasis on preventing scams and fraud should remind official bodies that this is a joint responsibility across the FCA, the Serious Fraud Office and more, not something to be conveniently off-loaded onto Sipp operators.”

Mr Leggett added that in the run-up to the new capital adequacy rules, “it is interesting that reference has been made to the existing prudential requirements”.

He said: “The rules are extremely complicated so genuine reporting errors are to be expected. We, like others, hold in excess of the required amount which help to protect against this.

“Regulatory arbitrage is different: Advisers should be wary of firms that set themselves up to avoid holding a prudential amount in capital and we can envisage this report as the first step in action being taken against Sipp firms that participate in such tactics.”

Mark Smith, operations director at Mattioli Woods, said that the two main issues are capital adequacy and non-standard assets.

He said: “Firms should have a real focus on due diligence. There has been lots of talk about a permitted investment list but that is not really the point as it does not mean that because an investment is on that list it is appropriate.

“The FCA says if you are looking after high risk assets, you should hold more capital which makes sense.”