We blogged previously on the tougher attitude that the FCA is taking concerning the obligations of SIPP operators, and the increased focus on the suitability of underlying SIPP investments.
On 31 October we had a concrete example of the FCA's pro-active attitude to high-risk or unusual SIPP investments when it published a statement regarding the promotion of shares in Emmit plc.
The FCA had become aware that individuals were being encouraged to transfer money from their workplace pension schemes into SIPPs and to use the SIPPs to buy shares in Emmit plc, an AIM-listed company, at a particular price from a particular market counterparty. The FCA has previously published an alert noting its concerns about schemes that result in SIPPs investing in high-risk investments.
The scheme in question must have seemed like an attractive proposition to many individuals, particularly as the FCA believes that those operating the scheme were primarily targeting inexperienced investors who might not understand the full implications of what they were doing. Potential investors were told that the price that they would pay for the shares was significantly below the price at which the shares normally traded. Some investors were even offered "cash back" from a third party of up to 30% of the transfer value of their pension if they participated in the scheme.
The initial success of the scheme is evident from the fact that at least 60-100 investors participated, together investing as much as £3m-£4m. In some cases individuals invested 100% of their pension assets.
Sadly, the old adage that if it looks too good to be true, it probably is, appears to have held true in this case. The FCA concluded that the purchase of Emmit plc shares by pension investors represented a significant proportion of the overall demand, and may have influenced the normal balance between supply and demand. Emmit plc's shares were trading at 97p in late October (and had been trading at as much as 200p earlier this year) but in December 2013 they had been trading at just 6p. The FCA notes that Emmit's liabilities exceeded its assets as at 30 June, with the clear implication that investors were overpaying for high-risk shares, rather than receiving a bargain as they appear to have believed. In addition, the FCA notes that the receipt of the cash incentive may amount to the withdrawal of assets from a pension scheme, which could trigger significant tax liabilities for the investors.
The FCA's investigation into the scheme in question is on-going, but in the meantime it has taken prompt action, liaising with the LSE to implement a precautionary suspension of the trading of the shares in Emmit plc. The FCA has made clear that there is currently no suggestion that Emmit plc itself was complicit in the scheme. What is interesting is that the scheme appears to have been brought to the FCA's attention by a number of SIPP operators. This will be encouraging news for the FCA, which has previously asked SIPP operators to be vigilant, and to report to the FCA firms believed to be carrying out these kinds of activities in breach of FCA requirements.
Following its thematic review on SIPP operators in the summer, the FCA has had a focus on ensuring that individuals who choose to invest through SIPPs are adequately protected. It has stressed that where advice is given to an individual to transfer a pension from a workplace pension scheme to a SIPP, the suitability of the underlying investment will form part of the advice given to the individual. The recent FOS decision relating to an investment entered into through a SIPP provided by Berkeley Burke suggests that, even where a SIPP provider is explicitly not advising an investor, it may still have a duty to ensure that unsuitable investments are not made (although we note that the FOS is currently reconsidering this decision, so may ultimately pull back from this conclusion). We understand that several SIPP operators have begun to limit the asset classes in which they will allow SIPPs to invest, reflecting the changing landscape in this area.
With further measures designed to give individuals more flexibility and control over their pension arrangements due to come into force next year, the issue of ensuring that individuals have suitable pension arrangements in place and are not persuaded to invest into unsuitably high-risk investments is likely to remain in the headlines for some time to come.