‘The Sipp nightmare for pension scam victims needs to stop’

It is a bizarre quirk of the system that self-invested personal pension investors who have lost their pension in a worthless, illiquid investment cannot free themselves of the shackles of ongoing costs associated with their wrapper.

The rules dictate that even after an investor has brought a successful claim through the Financial Services Compensation Scheme, a process that by definition serves to validate their position, they still have to pay several hundred pounds in Sipp fees every year as their contractual relationship continues, whether they like it or not.

This is unless the Sipp provider agrees to set them free by waiving their fees, which, needless to say, is not the preferred option of many providers. This is all assuming there are no other assets in the Sipp warranting the fees.

The issue stems from the fact that it is not possible for a Sipp operator to close a Sipp while an investment is still held within it, and it is sometimes not possible to transfer an underlying illiquid investment due to HM Revenue & Customs rules.

Looking at this from the consumer’s perspective, how is this in the spirit of the consumer duty — a duty that sets “higher and clearer standards of consumer protection across financial services, and requires firms to put their customers’ needs first”, the Financial Conduct Authority’s words, not mine?

A sale for a nominal amount could be considered value shifting by HMRC

I often get contacted by investors in such a dilemma. After realising they have lost £150,000-plus to a failed investment, perhaps mis-sold by a rogue adviser whom they trusted, and getting back £85,000 from the FSCS, they still find themselves a customer of the Rowanmoors of this world. 

With Rowanmoor specifically, this situation is made more bizarre by the fact that the Sipp company itself has failed. But the pension plans have been sold on, rescued, so to say, by yet another willing provider willing to keep them on as customers and let the fees continue — worthless pension plans or not.

For many, the problem is that their investment is de facto unsellable, after all it has been declared worthless by the FSCS due to it being illiquid.

But this does not mean that the asset is actually worthless. The FSCS is saying that the value is so uncertain that in order to provide fair compensation it will value the asset at nil.

Not off the hook

Adding to people’s confusion is that the investor’s interest in the underlying investment transfers to the FSCS after a claim. This is so that the lifeboat scheme can attempt to recover its costs — it makes sense.

But investors often take this to mean they are no longer the owner of the Sipp and are off the hook, which of course is not the case. The FSCS does not take over legal or beneficial ownership of the asset, that very much stays with the trustee.

The flip side is that the consumer may be able to sell or transfer the asset. However, which hapless buyer would they sell it to and at what price? A sale for a nominal amount could be considered value shifting by HMRC and can create an unauthorised payment charge, which in turn leads to a scheme sanction fee.

The situation is somewhat better after a Financial Ombudsman Service claim. Although the Fos cannot force an operator to close down a Sipp, it can factor in future ongoing costs in its award.

The Fos can also ask a Sipp operator to take ownership of an investment to enable the Sipp to be closed, or where an investment is illiquid and cannot be transferred it can ask the Sipp operator to waive future fees until the underlying investment can be transferred out and the Sipp closed.

It is also somewhat better when the investment is an actual fraud, such as Harlequin. In this instance, many of the companies were subject to insolvency processes, and where companies are liquidated, the pension scheme is no longer holding an asset that will deliver a benefit for the client and the Sipp can usually be closed.

It will be interesting to see whether £350 a year or more constitutes fair value for a worthless Sipp

The FSCS told me some time ago that different Sipps take different views when it comes to treating customers with illiquid investments.

It said: “Some Sipps will treat the underlying investment as illiquid earlier than others. Others take the view the Sipp cannot be closed until specific criteria are satisfied and that they are entitled or must continue to charge fees, whereas others are prepared to waive fees.”

The FCA says it engages with companies to ensure it is treating customers fairly in its charging approaches to failed assets. The watchdog may well be, but the outcomes are often not what consumers perceive to be “fair”. Distressing and incomprehensible are the more commonly used terms.

Consumer duty

So let us take another quick look at the consumer duty, a set of rules designed to protect the unwitting consumer.

The FCA is introducing rules that will “require firms to consider the needs, characteristics and objectives of their customers — including those with characteristics of vulnerability — and how they behave, at every stage of the customer journey”. 

I think we can reasonably assume anyone who has lost their whole pension to a scam is classed as “vulnerable”. We might also assume that “every stage of the customer journey” includes the contractual relationship after a Sipp investment has failed. 

The FCA’s consumer duty rules govern     

• products and services
• price and value
• consumer understanding
• consumer support.

I would assume that Sipp fees fall under price and value, and what consumer support means is unambiguous.

It will be interesting to see whether £350 a year or more constitutes fair value for a worthless Sipp, and whether “consumer support” is given to a client begging their provider to close their Sipp.

Perhaps the official bodies involved in creating this conundrum could think again. Otherwise it will be interesting to see how these provider practices will be defended in future.

carmen.reichman@ft.com