PensionsMar 23 2016

Sipp providers threatened by FSCS liability review

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Sipp providers threatened by FSCS liability review

A Financial Services Compensation Scheme (FSCS) review of liability for investor losses could have massive ramifications for self-invested personal pension providers, potentially putting them on the hook for hundreds of millions of pounds

Up until now, financial and reputational liability for ensuring clients’ investments are suitable has fallen almost exclusively to their financial adviser. Sipp providers have always denied responsibility for suitability, saying it is beyond their remit.

But that could be about to change, as the FSCS weighs its reaction to what could be the biggest investment failure since Keydata, and where a large chunk of the £400m invested in it was via Sipps.

Sipps that allowed investments via their platform into unregulated scheme Harlequin Property may face being pursued by the FSCS for investor losses, a spokesperson for the body told Financial Adviser.

“We have not yet commenced any action against Sipp providers in respect of Harlequin losses,” a spokesperson said.

“It is a position that we keep under review, and we may consider taking recoveries action in the future.”

With the FSCS last March writing down the value of Harlequin investments to nil, any providers deemed liable for the losses could face bills for millions of pounds.

Martin Tilley, director of technical services at Dentons Pensions Management, said: “The FSCS has no legal jurisdiction to approach Sipp providers [for recoveries]”.

Robert Graves, head of pensions technical services at Rowanmoor, said if the FSCS did take recoveries action “it would clearly be a financial hit”.

According to law firm Regulatory Legal, which acts on behalf of 1,000 Harlequin investors, Guardian and Lifetime have the largest Harlequin Sipp holdings. Neither responded immediately to requests for comment.

Mattioli Woods told Financial Adviser its recent purchase of Stadia Trustees included £433,000 of Harlequin assets, though Mattioli has not assumed liability for them.

The FSCS has previously pursued advisers for recoveries. In the case of Keydata, it took legal action to claw back some of the near £400m in compensation and levies the firm’s 2009 collapse cost the industry.

But it has never attempted the same with Sipp providers.

Ben Sear, managing adviser at Martin Redman Partners, said Sipp providers needed to take some liability for the investments they hold.

He added: “At the moment everyone wants to blame the adviser, and I appreciate it is the adviser who asks for assets to be included. But providers are clearly a check and balance. There are far more people on this gravy train.”

The FSCS started accepting claims against advisers who sold Harlequin just over a year ago. More than £36m in compensation has been paid out in relation to it over the past year, according to figures from the body, as advisers unable to pay claims against them go out of business.

According to Regulatory Legal, mainly pension investors poured around £400m into Harlequin, an unregulated scheme investing in overseas property in exotic locations such as the Caribbean and Brazil. The law firm said some adviser commissions on the investment reached up to 15 per cent.

But as of last June, Harlequin had failed to build all but 113 of about 6,000 promised villas, leaving investors without their capital or returns. Harlequin did not respond to a request for comment on any progress since then. The company is embroiled in a series of legal battles, amid a separate investigation into its affairs by the Serious Fraud Office.

In July 2014 the FCA wrote a ‘Dear CEO’ letter to Sipp providers saying it had found “widespread” failings relating to issues such as due diligence, and told them to put stronger procedures in place for non-standard investments such as unregulated schemes.

This followed FCA guidance in 2013 that said: “Although the members’ advisers are responsible for the Sipp investment advice given, as a Sipp operator the firm has a responsibility for the quality of the Sipp business it administers.”