Your IndustryDec 12 2018

Could ruling spark Sipp exodus?

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Could ruling spark Sipp exodus?

A number of industry experts have warned self-invested personal pension providers may exit the market altogether in the wake of a recent legal judgment, and those who choose to stay will become more diligent in deciding what type of investments their clients can make.

Sipp providers can no longer wash their hands by accepting business on an execution-only basis, according to a court ruling by Mr Justice Jacobs in Berkeley Burke v the Financial Ombudsman Service at the end of October. 

Philip Jelley, a solicitor at law firm Norton Rose Fulbright, says: “There are a number of implications of the ruling that clearly show there is a divergence of opinion between the [Fos] and the Pensions Ombudsman.

“I expect that if any Sipp members have a potential complaint against their Sipp provider relating to the poor performance of an investment they will take their claim to the Fos rather than the Pensions Ombudsman, as they are likely to have a far greater chance of success.” 

He adds that Sipp trustees will be reviewing not just new investments, but all existing investments to ensure they are compatible with the ruling. 

Subject to appeal 

The ruling, however, is not final and Berkeley Burke has chosen to appeal. But if upheld, it means Sipp providers will be obliged to take greater due diligence in deciding whether an asset is appropriate. 

Sipp administrator Berkeley Burke had argued it had a duty to abide by the Conduct of Business rule 11.2.19R, which stipulates that “whenever there is a specific instruction from the client, the firm must execute the order following the specific transaction”.

But the Fos and the Financial Conduct Authority stated that Cobs 11.2.19R (1) was subject to the FCA client protection principles. This means the transaction should only be carried out if it’s in the client’s best interests. 

The Sipp provider’s client, Wayne Charlton, had complained to the Fos in 2011 after he lost part of his personal pension from a Sipp investment he made in 2011 in Sustainable AgroEnergy, which purported to extract biofuel from Cambodian trees. Berkeley Burke insisted it did not advise Mr Charlton and therefore was not liable for the loss he incurred, but according to the judicial review Sipp providers can only carry out transactions if it is in the client’s best interests. 

Mr Jelley says: “The current position is effectively imposing an additional responsibility on Sipps to ensure the member is making a good investment decision and the cost of that analysis will be passed on to members.”

But he adds: “There is an argument that the FCA’s client protection is too restrictive in these circumstances.” 

So what will happen to Sipp providers, if the ruling does remain intact? 

Non-standard investments 

Experts say the ruling means Sipp providers will further reduce their exposure to non-standard and unregulated investments.

The debate surrounding clients’ exposure to non-standard investments in Sipps has been bubbling for a while, in part thanks to capital adequacy rules introduced in 2016. From that year, if Sipp providers want to offer non-standard investments, they must hold more money in their bank accounts.

Key points

  • Sipp providers can no longer accept business on an execution-only basis.
  • There is a debate over how much intervention a Sipp provider should have in a client transaction.
  • The judgment could mean a green light for claims management companies chasing Sipp providers.

Rory Gravatt, consultant at Altus Consulting, says: “Many providers have moved away from permitting non-standard investments such as those that triggered the case, and more will follow as a result of this verdict.”

A non-standard asset is one which cannot be correctly valued and realised within 30 days. Standard investments can be realised within 30 days and typically include products such as cash, bonds, exchange traded commodities and UK commercial property. 

Mr Gravatt adds: “This partially aids advisers in their selection criteria, but more key is what liability to NSIs does a provider already have and what controls were in place to protect customers and the scheme.”

Martin Tilley, director of technical services at Dentons Pension Management, says: “It is possible that certain non-standard and non-regulated investments might find it more difficult to find an accepting Sipp provider, or if they can, may have to suffer increased costs to cover the provider’s due diligence.”

Adam Tavener, chairman of Clifton Asset Management, says: “Many providers have already moved away from NSIs, and more will since they won’t be able to satisfy their professional indemnity insurance providers that their systems are sufficiently strong to weed out the potential problem investments.”

Green light 

The judgment has also been called a “green light” for claim management companies, which could ultimately dent all Sipp providers, including those who have done their homework in exercising the right levels of due diligence. 

“It is unfortunate that the judgment released last month could be regarded as a green light for CMC’s to ‘carpet bomb’ the Sipp provider market,” warns Mr Tilley. 

“While there is no downside to making a claim, irrespective of the probability of success, the complaint or claim will still need to be researched and responded to which will choke some firms’ resources, irrespective of any wrongdoing.

“Sipp providers are likely to receive a subject access request in the first instance, which could be seen as a ‘fishing’ exercise in order for the CMC to get hold of a copy of the complete client file,” explains Mark Smith, chief operating officer of Mattioli Woods. 

A subject access request is a written request made by or on behalf of an individual to ask for information that he or she is entitled to under the Data Protection Act. 

According to Mr Smith, this would enable individuals to construct a potential claim against the Sipp provider, and several CMCs already have a sufficient level of information to know the processes Sipp providers had and where the weaknesses are. 

Consolidation 

So will Sipp providers fall prey to the more stringent regulatory environment and exit all together? 

Mr Smith certainly believes so. He says: “I believe there are likely to be failures of Sipp providers and as a result  this will lead to further consolidation. The cost or regulatory burden of continuing to operate in this market will only continue to increase.”  

But Alex Milligan, financial adviser at Pensionlite, does not expect consolidation. He says: “It is unlikely to lead to an exit of providers purely on cost basis. However, and potentially quite rightly, it should hopefully put more focus on Sipp providers to protect the consumer.” 

Mr Taverner says: “A number of specialists will choose to stay in and continue to offer ‘true’ Sipps since there will always be demand for high-quality investments that fall outside of the standard group. Peer-to-peer is a good example.”

Mr Tilley believes overall there will be consolidation of Sipps. But he adds: “For those Sipp providers continuing, they will need to assess if they wish to continue to operate as widely in the market, or if they will temper their proposition, accepting only a reduced scope of investments.” 

Saloni Sardana is a features writer at Financial Adviser