SIPPFeb 7 2018

Sipp market thriving despite complaints concerns

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Sipp market thriving despite complaints concerns

One of the problems with this sort of prediction is that there are many different ways of defining a Sipp. Wind the clock back almost 30 years to 1990 when the first Sipps hit the market and the product was very different. They were much more aligned to Nigel Lawson’s original blueprint, outlined in 1989 when he was chancellor, giving individuals freedom to invest more widely than the traditional personal pension.

Today the Sipp product life cycle has moved on significantly. However, many Sipps now actually resemble the personal pensions on which they were based – the main difference being that instead of being locked into a single life company’s poor performing and very expensive funds, the advent of platforms has meant that multiple funds and a range of other investments are now readily and cheaply available.

Not much more than 10 years ago a Sipp was an aspirational product largely for the elite. Today it has been commoditised and the issues affecting the market have changed.

One of the biggest concerns is the possible brand damage to Sipps caused by an increasing number of regulatory abuses, mainly involving inappropriate and often unregulated investments and advisers. Headlines involving Sipps related to frauds, scams and ill-advised investments are becoming regular.

Some of this negative publicity is as a result of the ill-conceived regulatory framework that governs those operating and advising on Sipps. This includes two ombudsmen and a complex and opaque compensation system that has done little to stem the flow of Sipp investment scandals.

In the past 18 months I have provided expert reports on several different Sipp legal or regulatory related issues. In all cases these related to investments made by Sipp investors over the period 2006/2014. These dates are significant as they coincide with two big changes in the investment framework for Sipps.

The first was the fundamental change to tax legislation in 2006 known as A-Day, which effectively allowed Sipps total investment freedom albeit with potentially penal tax charges where the investment was deemed to be “taxable property”. It should not be overlooked that the FSA authorisation for Sipp operators was not introduced until a year later, providing a window of uncertainty over investments made in that period that subsequently failed.

Key points

  • Sipp market should remain strong despite rise in complaints. 
  • The products have evolved into being mainstream leading to some misuse. 
  • Regulators have always kept a close eye on the market.

That window got a lot bigger as a result of the first of the FSA’s three thematic reviews of Sipp operators, published towards the end of 2009. Surprisingly, given the concerns some FSA officials already had at that time over the activities of some Sipp operators, the FSA’s published report following this first thematic review contained the statement: “We do not believe that, taken as a whole, small Sipp operators pose a significant threat to our statutory objectives.” There is no doubt in my mind that this comment led to complacency among some Sipp operators. 

The following three years until the end of 2012 was the period in which most damage was done to the reputation of the Sipp industry through the activities of unregulated introducers, a small number of incompetent and unscrupulous advisers and a few complicit Sipp providers coupled with some inertia by the FSA. It seems extraordinary that given the number of high-profile investment failings at this time the FSA did not initiate a second thematic review until April 2011, which then took 18 months to complete. 

The case of 1 Stop Financial Services, about which the FCA finally published a notice in April 2014, is a prime example. 1 Stop was a small advisory firm in South Wales authorised in 2004. During the period from October 2010 to November 2012 it set up almost 2,000 Sipps. That was more than 1 per cent of all Sipps set up in the UK during that period. A substantial proportion of that business was introduced to 1 Stop by unregulated advisers.

By October 2012, 97 per cent of the business’s revenue was derived from Sipps. Indeed, during the two-year period up to the end of October it had earnt more than £4m in revenues from Sipps. The average Sipp investment was less than £60,000 and 49 per cent of the customers involved invested in overseas property developments operated by Harlequin Property. How that was allowed to happen without prompt regulatory intervention continues to baffle me.

1 Stop Financial partners were banned in 2014 by the FCA and the firm has ceased trading.

In its second thematic review the FSA highlighted that there was evidence the relatively widespread misunderstanding among Sipp operators discovered in its first review, “that they bear little or no responsibility for the quality of the Sipp business that they administer,” remained prevalent three years later. It also commented that some Sipp operators were unable to demonstrate that they were conducting adequate due diligence on the investments held and, in some cases, there was over-reliance on third parties to conduct due diligence on behalf of the operator.

The publication of the FSA’s second thematic review in late 2012 was a watershed in the regulatory oversight of Sipps with far-reaching consequences for Sipp operators. The second thematic review effectively introduced a new set of standards for Sipp operators in the area of due diligence of investments and associated responsibilities. Whether those standards are reasonable given the nature of Sipps remains a matter of debate – even more so following the recent Financial Services Compensation Scheme (FSCS) decision to declare three Sipp operators in default. The FSCS also said it has received 150 claims against these companies over due diligence failings, "but we expect to receive many more claims in 2018/2019". Bear in mind that all three Sipp providers were operating well before my watershed date of November 2012.

What is clear is that a number of other active Sipp operators have a potential exposure to investments taken on or after that date – and possibly before it. In preparing a report on the Sipp market to be published later this year I estimated that Sipp operators have a potential exposure to more than 10,000 claims with an aggregate value of more than £1bn.   

Yet despite all this negativity the Sipp market continues to thrive – no surprise when a separate report from Fintech organisation Origo stated that Sipps accounted for 51 per cent of all transfers through its automated service in 2017 – that is more than £15bn. Despite recent concerns over British Steel transfers and more generally concerning pension transfer advice, it seems certain that the Sipp market will continue to grow.

However, largely that will involve Sipps using mainstream investments. The picture for the more bespoke end of the Sipp market looks far less promising with further consolidation of operators almost inevitable.

The risk that the FSCS decision might open the floodgates to claims against active operators being pursued in the courts is real – which could lead to further collateral damage for the Sipp industry and its brand. That is not something Nigel Lawson would have had in mind when he proposed extending the investment choice for Sipps back in 1989. 

John Moret is principal of MoretoSIPPs