SIPPNov 14 2018

How to future-proof the Sipp

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How to future-proof the Sipp

Some self-invested personal pension providers will be contemplating the closure of their business following the recent High Court judgment involving the Sipp provider Berkeley Burke. 

The judgment has been well reported, but essentially Berkeley Burke appealed a final decision by the Financial Ombudsman Service in favour of an investor, Mr Wayne Charlton, who in 2011 made an investment via a Berkeley Burke Sipp in a ‘green oil’ scheme in Cambodia, which turned out to be a huge scam. 

The ombudsman, while agreeing that it was not the provider’s responsibility to ensure the suitability of the investment, concluded that Berkeley Burke had not acted with due skill, care and diligence in accepting ‘green oil’.

The judgment also confirmed Fos was correct in not necessarily following previous precedents set by the Pensions Ombudsman as the two organisations had different statutory frameworks for reaching their decisions. Basically, Fos uses a “fair and reasonable” test, whereas Pos determinations are based on matters of fact and law. 

Why do we need two ombudsmen subject to different regulatory frameworks and with overlap in cases they can consider? 

Pos deals with administration and management issues and it seems possible that it would have reached a different decision with regard to the due diligence requirements – as in previous cases it has taken into account industry practice at the time.

There seems to be a need for greater clarity over claims of this type as there is a risk of regulatory arbitrage, with individual investors and their legal advisers approaching Fos or the courts, rather than Pos.

The judgment in favour of Fos was not a total surprise. But the implications of the decision – particularly a Sipp provider’s historic regulatory responsibilities regarding the undertaking of due diligence on investments – are significant.

Written warning

What has caused jitters among Sipp providers is the chief executive letter sent to all Sipp operators by the Financial Conduct Authority. This was sent concurrently with the judgment being published – suggesting the FCA either had advance knowledge of the decision or was confident in the outcome. Given the judgment is to be appealed, the letter seems to be a little premature. 

The letter emphasises that the FCA considers “investment due diligence” requirements have applied since the operation of Sipps was first regulated in April 2007. It stresses that Sipp operators should consider the implications of this and it goes on to talk in some detail about the possibility of some businesses having to be sold and the need to communicate any such intentions to the FCA at an early stage.

The letter ends by warning any senior managers involved in such matters abouttheir behaviour.

The letter seems to be an open invitation to “claims chasers” to lodge claims relating to any investment that has underperformed or failed since 2007. As the FCA must know, the majority of Sipp providers did not have any formal due diligence procedures for vetting investments in place untilafter their first thematic review in 2009.

In many cases this wasn’t because of negligence, but simply because they were unaware of any such need.

The history of Sipp regulation

It is often overlooked that the first Sipps were sold in 1990 and operated in a largely unregulated environment until 2007, by which time there were more than 250,000 Sipps – some of which would have held “non-standard” investments.

Up until 2006 there was effectively a ‘permitted list’ of Sipp investments that almost all providers observed. In April 2006 pensions simplification did away with this list and basically a Sipp could hold any investment – albeit potentially subject to tax charges.

The regulation of the operation of Sipps was rushed through in 2007. The then Financial Services Authority, or FSA, was ill prepared and under-resourced – as were many Sipp operators that suddenly were faced with operating in a regulated environment for the first time.

There was virtually no regulatory help or guidance until the first thematic review findings were published in late 2009. That review was mentioned in the court proceedings, but conspicuous by its absence was this telling FSA comment: “We do not believe that, taken as a whole, small Sipp operators pose a significant threat to our statutory objectives.”

It is true the report highlighted the risks to investors and to Sipp operators in a failure to monitor their business adequately with reference to the six ‘Treating Customers Fairly’ consumer outcomes, and it suggested operators should routinely record and review the type, size and nature of Sipp investments “….. so that potentially unsuitable Sipps can be identified”.

However, at no point was the undertaking of “investment due diligence” mentioned. Indeed it was not until the second thematic review was published at the end of 2012 that there was any specific reference to this aspect.

During the intervening years I had several conversations with FSA officials and chaired a number of conferences at which they spoke and I do not recall investment due diligence ever being mentioned. 

Rethink the reality

The ramifications of the Berkeley Burke judgment could be profound. Where, for example, do you draw the line on due diligence requirements? Are personal pension providers subject to the same requirements in respect of higher risk funds?

Is ‘caveat emptor’ effectively dead, particularly where there is no financial adviser involved? And why do we need two ombudsmen subject to different regulatory frameworks and with overlap in cases they can consider? 

Sipp providers will be considering what action to take in response to the FCA letter, especially as several other judgments in similar cases are likely to be handed down in the coming months. There is no guarantee that the same conclusions will be reached as in the Berkeley Burke case, which is going to be appealed. 

I have always believed the regulatory framework for Sipps is inappropriate. Sipps are not packaged products and I think a reappraisal of Sipp regulation is needed and should consider:

• New permissions for any Sipp operator holding ‘non-standard’ investments.

• Defining what constitutes an ‘appropriate’ investment for a Sipp.

• Setting out new standards for business which is accepted on an ‘execution only’ basis.

• Clarifying just what is ‘adequate’ investment due diligence.

There is no doubt some Sipp providers have failed to meet the standards one might reasonably expect and will rightly face the consequences. However, the reality is almost all providers have exposure to some investments that have failed or performed badly.

The extent to which those investments can be deemed inappropriate or were subject to inadequate due diligence is critical and may determine the shape, participants and size of the Sipp market in future. I suggest too that the FCA reflects on its role in reaching this position – particularly in the early years of Sipp regulation – and considershow things can be improved for the future.

John Moret is principal at MoretoSipps