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.