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?
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.