In recent years, mis-selling of self-invested personal pension schemes has been in the spotlight and official bodies, including the Financial Conduct Authority and the Financial Ombudsman Service, have recently had a huge crackdown on advisers, pension providers and third-party introducers.
The average pension mis-selling victim loses £91,000, with many losing much more than that. The process of mis-selling can take many forms and in most cases the process begins with a third-party introducer.
Third-party introducers, in many cases, are unregulated and unqualified to offer impartial and knowledgeable advice. These introducers financially benefit from a scheme thanks to ownership or commission and their primary aim is to grow the value of the fund.
Sophisticated scams
More often than not, these introducers will get in touch with a potential investor by cold-calling, then form a trustworthy relationship by offering a free pension review.
In many cases, there is little evidence to suggest that a pension review is carried out by the introducer.
Instead, it is a ruse to access the investor’s financial information to discover the potential value that could be brought to the introducer’s fund.
Following the free pension review, the introducer concludes that the customer does not have enough saved to live off in retirement.
As the customer believes that the introducer is legitimate, they are left with concerns about their finances. Introducers take advantage of the vulnerability to then pitch the investment they are selling.
The pension scheme always sounds too good to be true, because it is.
Promises of high yields for very little risk are offered by the introducer and, with the trust in place, the customer takes them up on the offer. In many cases they have little or no diversification in their portfolio and invest their whole pension pot in a single investment.
Thousands of our own clients have been duped in this way and have invested into unregulated schemes through a introducer.
These schemes regularly include overseas properties, forestry plantations, storage pods and car parking, to name a few. They all have one thing in common and that is the scheme is unregulated.
Due to the high risk nature of unregulated schemes, they should be reserved for those with experience in and a vast knowledge of investments, as well as individuals who can afford to lose the money if the investment fails.
This is because there is no safety net for individuals who lose their money in an unregulated scheme.
The FCA has not authorised the companies to provide investment advice or transfer pensions, therefore no compensation will be available directly from the Financial Services Compensation Scheme in the event of the investment failing.
Schemes such as Ethical Forestry saw at least £54m invested by people who believed the scheme had no risk and placed their life savings into the Costa Rican plantation. They lost everything when the plantation was destroyed by a hurricane and the scheme failed.
In the event of a scheme failing, investors should seek independent, regulated financial and legal advice to discuss the action they are able to take and any other avenues, such as litigation.
Duty of care
While the introducers use unethical practices to bring investors to a scheme, we believe providers of Sipps are just as accountable for their lack of due diligence.
We believe that as pension providers, they have a duty of care to their client to assess the appropriateness of an investment for a Sipp.
Assessing the appropriateness of the investment should include proper due diligence of the investment and also whether a realistic annual valuation of the investment can be made.
The failure to do so puts the investor at serious risk of losing a retirement income or not being able to make retirement planning decisions on an informed basis.
Ban not silver bullet
Many measures have been taken by the FCA to protect consumers.
The recent ban on pension cold calls was a positive step forward and will hopefully see a decrease in activity from introducers, however it will not prevent Sipp mis-selling altogether.
The ban only covers UK based companies, meaning that overseas companies, where the largest risk lies, will continue to operate as usual. UK based companies will likely circumvent the ban by also moving their operations overseas to continue in their unregulated activity.
The FCA will need to continue to educate the public on these scams and how to prevent them, as well as highlight the Sipp providers that only allow standard regulated assets and offer impartial advice.
However, scam operators continue to evolve their business practices and are becoming more sophisticated with time.
Our advice would be to do their own due diligence on Sipp providers and schemes before sharing any financial information.
Glyn Taylor is financial mis-selling solicitor at APJ Solicitors
