Self investment personal pension (Sipp) providers may find themselves having to cover the cost of failed investment claims as their professional indemnity (PI) insurance may not be sufficient to cover it for them, FTAdviser has learnt.
FTAdviser understands Sipp providers are facing increased difficulty obtaining sufficient PI cover as the fallout from past business decisions comes home to roost.
Phil Smith, CEO of Embark Group, said certain Sipp providers have faced this problem for some years.
He said: "We have £10m of cover which we are very happy with and are not seeing cost pressure. We are aware others are having trouble securing cover at all, and have been for several years. There is sensitivity to in-specie contributions, defined benefit pension transfers and other large sector issues.
"It is no different in the IFA market, who have much more PI cover and price pressure, so it’s a natural consequence that it filters down the value chain."
Sipp claims have been on a steady rise for some time, especially in connection with transfers out of defined benefit schemes and into high risk investments, which later turn out to have failed.
Recent statistics from the Financial Ombudsman Service (FOS) showed there were 922 new Sipp complaints submitted in the first quarter of 2018, compared with 521 complaints during the same period last year.
The data also showed Sipp complaints were of the most upheld during the first quarter of 2018, with 59 per cent of all complaints being upheld.
There is currently a lack of clarity as to whether or not Sipp providers are responsible for money lost as a result of investors placing it into high risk or non-standard assets in their wrappers.
The regulator has been clear it expects providers to check the underlying asset is a suitable investment but whenever there is an adviser involved Sipp providers have pointed to their responsibility for ensuring the investment is suitable for the client.
A case currently awaiting judgement in the courts, Russell Adams vs Carey Pensions, is expected to shed light on Sipp provider responsibility in the investment chain.
The claim arose when Mr Adams made an investment that later failed and claimed Carey Pensions should have prevented him from investing. Carey Pensions’ defence was that the claimant’s contract agreed there was no advisory relationship in relation to his investment choices.
John Moret, principal at consultancy MoretoSipps, said: "In some cases, Sipps are being held responsible for the money lost as a result of high risk investment, but there is no rule put in place that says they are responsible.
"The verdict of the Adams VS Carey case may give some clarity of the extent to which the provider is responsible, because at the moment there are a lot of unanswered questions. Providers are unsure of their responsibility when it comes to unregulated investments."
He added: "We know of a number of group claims which in some cases involve several hundred investors. If those claims are found to be valid it is very unlikely that PI insurance held by the respective providers will cover the claims. There is the possibility that the cost of PI cover will increase and in turn providers may find it difficult to afford."
One Sipp provider, who wished not to be named, said the complaints being made against providers were being driven by claims management companies (CMCs).
"The industry is becoming irreparably tarnished by CMCs going after Sipp providers," the source said.
"Complaints are likely to go up by 50 per cent in the next quarter, this is being driven also by the recent increase in complaints. Ultimately providers will need to deal with these complaints and PI insurance will only cover so much of these claims. If providers see hundreds of claims then this will end up costing them directly."
rosie.quigley@ft.com
