Self invested personal pension providers are facing a new type of complaint brought in relation to investments made via investment managers – is this a potential area of risk for SIPPs or is this taking their obligations one step too far?
The typical scenario – the direct investment
As those that follow developments in the SIPP market will be aware, SIPP providers have been facing an increasingly difficult battle before FOS when it comes to due diligence undertaken on assets at the time assets are incepted in to a SIPP. The Berkeley Burke judicial review confirmed the FOS' position on what it considers are the due diligence obligations of SIPP providers at paragraph 35 of the High Court's judgment.
In the wake of the insolvency of Berkeley Burke and, as a result, the end of the appeal of the High Court judgment, we are aware that the FOS wrote to SIPP providers with complaints pending before FOS inviting those SIPP providers to revisit complaints in light of the High Court's judgment. We also understand that FOS has been reopening previous complaints upheld in favour of SIPP providers.
These developments are arguably limited to the issue of what FOS considers it is fair and reasonable for a SIPP provider to do in terms of due diligence when incepting an asset into a SIPP. They arguably do not deal with what the legal obligations on SIPP providers are (we are waiting for Adams v Carey for hopefully some clarity there), what if any ongoing due diligence obligations fall on a SIPP provider and what obligations of due diligence does a SIPP provider have for investments made via an investment manager (including discretionary fund managers, discretionary investment managers and offshore bonds) (IMs). It is this latter issue which appears to be coming to the fore following recent insolvencies of investment managers which hit the press this week (albeit for an IFA firm).
Investments via an IM
We are not aware of any published FOS decisions on this issue, so what is it a SIPP provider may have to do? To start with the FCA has spoken about this. In the FCA Handbook No.28 the FCA broadly appear to say that a SIPP provider should put contractual arrangements in place to ensure that an IM portfolio comprises "standard" assets and a "standard" asset is one that can be valued on a continuous basis.
But what more should the SIPP provider do? In our view a SIPP provider should check the permissions of the IM for any obvious fraud risks (does the IM have relevant permissions and what can it invest in compared to the contractual documentation in place?). Also, if the SIPP business is coming from an IFA, does the IFA have relevant permissions and if there is no IFA, is there an unauthorised introducer involved?
Beyond this, what more is it a SIPP provider should do? For example, should it be checking what investments have been made by the IM and questioning these investments if they are, for example, high risk or a single asset class? This is where the difficult questions come in. Most SIPP providers were unaware of what investments an IM had made until the introduction of the capital adequacy rules in September 2016. As a result, no ongoing monitoring was conducted to check investments fell within the contractual arrangements SIPP providers had in place with the IM, but equally no check was conducted on the underlying investment – but does this matter?
This is the key question for SIPP providers facing complaints about losses held within IM portfolios. In our view – if the IM is properly regulated with the right permissions, the contractual documentation as required by the FCA is in place and there is an authorised IFA (and ideally one unconnected to the IM) directing the IM investments – then there are good defences for the SIPP provider. This is because the SIPP provider has conducted due diligence on the investment, it is just that the investment is the IM. Further, if a SIPP provider went further and started raising questions around the investments held via IMs there must be a risk the SIPP provider strays beyond its permissions into providing investment advice – a breach of FSMA – and as a result there is a good argument that once the investment via the IM is made there is not much the SIPP provider can do about it.
There are some high-profile insolvencies of IMs at present – SVS Securities, Strand Capital and Horizon Stockbroking Limited – we are expecting and have already seen complaints arising out of these insolvencies. As always, the complaint against the SIPP provider typically comes where the SIPP provider is the only remaining regulated entity in the investment chain.
We may shortly see some of the unanswered questions around SIPP provider due diligence and IMs answered as a result.