There have been a number of recent developments which have renewed the focus of SIPP providers and how they manage underlying investments.
These include the Financial Conduct Authority's (the FCA) response to a number of questions posed by the Work and Pensions Select Committee (WPCS) on 8 June 2018.
Further, recent decisions by the Financial Ombudsman Service (the FOS) to uphold complaints against Guinness Mahon Trust Corporation (GM) are significant as they have previously placed a number of similar complaints on hold pending the decision in the Russell Adams v Carey Pensions UK LLP (the Adams case) rumoured to be published next month.
The FCA's response to the WPCS
In its response the FCA confirmed that, between 2015 - 2017, only 2% of the total assets under management with the largest SIPP operators were non-standard or unregulated investments. That translated to roughly £5.97bn in assets by September 2017 out of a total £300.21bn of total assets under management. As such, the FCA confirmed that is was not, for the time being, considering banning non-standard investments for SIPPs.
The FCA did confirm however that it has rules in place which oblige SIPP operators to assess if there are potential problems with an investment and / or an introducer. The FCA has recently intervened in the Adams case and summarised exactly what they expected of SIPP operators in terms of due diligence. It is worth setting out those expectations while noting that we expect the decision in the Adams case to provide further clarity on the obligations for SIPP providers. The FCA summarised a SIPP operators due diligence obligations as follows:
- "SIPP operators should take reasonable steps to ensure that it does not accept into the SIPP an asset that is likely to give rise to tax liabilities within the scheme;
- a SIPP operator has a responsibility to take reasonable steps to ensure that a proposed underlying investment for a SIPP is a genuine asset, and is not part of a fraud or scam;
- A key part of the task of a SIPP operator is to receive, hold and administer the underlying asset held in the SIPP. In order to carry out that role in accordance with the client's best interests in accordance with COBS 2.1.1R a SIPP operator must satisfy itself that it or its trustee has proper custody of and good title to the underlying asset;
- SIPP trustees are subject to specific obligations to provide clients with realistic annual valuations of assets held in a SIPP. Accepting an underlying asset into a SIPP without having taken reasonable steps to ensure that it or its trustee will be able to undertake realistic annual valuations would amount to a breach of COBS 2.1.1R and a failure to act in the client's best interests."
The FCA stated that a breach of their rules resulting in loss to a consumer could give rise to a claim for negligence and / or in breach of its statutory duty under S.138D of the Financial Services and Marketing Act 2000 (FSMA).
In commenting on why it did not consider a ban on non-standard investments was necessary at present, the FCA commented that it considers suitable advice from financial advisers with effective due diligence checks by SIPP providers to be the more effective way at preventing harm to consumers. This is especially so because not all non-standard investments are high risk eg commercial property or fixed term deposits which are only deemed non-standard as they are not capable of being liquidated within 30 days.
Mis-selling complaints upheld by the FOS
The latest data released by the FOS on 22 August 2018 shows that SIPP related complaints have nearly doubled. Between April and June 2017 the number of SIPP related complaints received was 521. For the same period in 2018, that number increased to 922.
A number of those complaints were made against GM where the complainants held that GM ought to have refused the non-standard investment because it followed advice from an unregulated introducer firm, Avacade Limited (Avacade). The complainants argued that GM should have had doubts about the competency and motivation of Avacade, an entity which is separately being investigated by the Serious Fraud Office. In finding in favour of the complainants, the adjudicator is acknowledging that GM had a duty to investigate further who they accepted referrals from.
These decisions stand out because the FOS has refused to make decisions on a number of similar complaints until the decision in the Adams case has been published. It is open to GM to appeal the adjudicator's decision and we must wait to see if it does.
The industry also awaits the judgment in the Adams case which may be published next month. It will be interesting to see whether the courts follow the position set out by the FCA. If the courts do align with the FCA and find Carey Pensions liable for, amongst others, failing to conduct adequate due diligence, then we can expect complaints and claims against SIPP providers to increase even further.