InvestmentsSep 8 2014

FCA letter calls Sipp operators to action

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The Financial Conduct Authority (FCA) has recently written to chief executives of self-invested private pensions (Sipp) operators in a “call to action”.

In the letter, the regulator says the issues it raised concerns about in its October 2013 Thematic Review remain and Sipp operators are not playing their part in preventing scams and pension fraud.

The FCA is scrutinising companies acting as trustees and administrators for investors’ Sipps and, although its October 2013 guidance was unchanged from that issued in 2012, the regulator’s paper suggests an increased interest in Sipp operators – especially when considered alongside its new capital framework.

In addition, the regulator comments that Sipp operators are to have some responsibility for the “quality” of the Sipp business they administer. It suggests operators should undertake due diligence on investments that investors seek to introduce to their Sipps, and for Unregulated Collective Investment Schemes (Ucis) that responsibility was “enhanced”.

The ‘Dear CEO’ letter refers not to Ucis but to non-standard assets – those that would incur additional time and cost should they need to be transferred to another operator, and which were listed definitively in a policy statement in August.

The FCA’s letter also appears more forceful. Rather than suggesting operators consider certain due diligence, such as collecting management information on investments introduced to Sipps and measuring against benchmarks, it wants operators to ensure investments are:

• Not a scam or linked to fraudulent activity, money laundering, or pensions liberation;

• Capable of independent valuation;

• Safe and secure (which the FCA appears to consider as being subject to a binding contract); and

• Not impaired (the FCA gives an example that previous investors in the same asset have previously received the income expected from it).

Unlike in its 2013 paper, the FCA does not list procedures that it considers good practice, rather it notes that operators had difficulty completing due diligence for non-standard, overseas assets. It says operators should be able to ascertain the structure of an investment, where pension funds are being transferred, and should not rely solely on a provider’s marketing literature to do so. The FCA’s views are oft-quoted by investors whose Sipp investments have not performed well and who seek to claim against the operator.

Recently, in a case the Financial Ombudsman Service (FOS) deemed it had jurisdiction to consider, a complaint against a Sipp operator that had accepted a pension investment in potential Ucis, AgroEnergy, to a client’s Sipp was upheld.

The ombudsman noted that the investment was unusual and esoteric and the operator should have been aware the investment and the Sipp were potentially unsuitable for the client.

The ombudsman went on to cite the July 2009 Sipp Thematic Review paper, which referred, among other things, to identifying anomalous investments to enable the firm to seek appropriate clarification of the suitability of what was recommended to the client.

This FOS decision is believed to be the first of its kind and out of kilter with decisions from the Pensions Ombudsman Service, which, to date, has expected only limited duties of due diligence on operators.

The pressure on Sipp operators has increased further as the Financial Services Compensation Scheme (FSCS) declared four independent financial advisers (IFAs) in default, all of whose businesses were based on giving advice relating to Sipp investment. The FSCS predicts more IFAs will default given the volume of enquiries it has received from Sipp investors who have lost money. It clearly remains the FCA’s view that Sipp operators should undertake some due diligence on the investments clients seek to introduce to their pensions. This is particularly the case where those investments are Ucis and, if different, non-standard.

The FCA’s views will continue to be quoted in claims brought against operators. Those claims are set to increase if more IFAs are declared in default and investors have no other target for a claim but the operator. However – and notwithstanding the surprising decision from the FOS recently – the FCA’s concern appears to be that operators assist with detecting pension fraud rather than ensuring a Sipp investment is suitable per se. In theory, an operator can still accept non-standard assets “with adequate procedures in place to assess those investments”.

John Enoch is a partner and Caroline Hall is a senior associate at law firm CMS

The FCA View: Sipps and non-standard assets

In its policy statement on a new capital framework for Sipp operators, the FCA states:

“At the current level of capital requirement, there is a real risk that when a Sipp operator exits the market it cannot afford to continue to administer its pension schemes, find another administrator for the pension book, or fund the closure, even when fee income is still coming in. This is particularly so where the firm administers non-standard assets, which add significant complexity from the perspective of a firm that considers acquiring the pension book. This can lead to pension schemes being left without a functioning administrator, creating uncertainty and possibly a significant tax charge for the consumer.”

Sipps and the FCA: Standard Sipp assets identified by the FCA

•Bank account deposits

•Cash

•Cash funds

•Corporate bonds

•Exchange traded commodities

•Government and local authority bonds and other fixed interest stocks

•Physical gold bullion

•Investment notes (structured products)

•Shares in investment trusts

•Managed pension funds

•National Savings and Investment products

•Permanent interest bearing shares

•Real estate investment trusts

•Shares listed on:

The Alternative Investment Market;

The London Stock Exchange; or

A recognised overseas investment exchange.

•UK commercial property

•Units in regulated collective investment schemes

Key Dates

2007 – Sipp operators came into the scope of regulation overseen by the FCA’s predecessor, the Financial Services Authority, as part of the government’s approach to promoting pension saving.

November 2012 – The FCA consulted on a new capital framework for Sipps, to address the issue of additional costs generated at wind-up by investments in non-standard assets.

August 2014 – After considering feedback, the FCA publishes its final policy statement on the capital framework for Sipp operators.

September 1 2016 – The new rules on the Sipp capital framework come into effect.