In a report published by the FSA in October 2012, the FSA has concluded that SIPP operators pose a significant risk to the FSA’s statutory objectives and that there is the potential for operators to cause significant customer detriment. As a result the FSA intends to embark on a programme of co-ordinated work, including a series of consultation papers and a policy statement to ensure that SIPP operators are fully aware of the expectations of the FSA and are devoting enough to regulatory compliance.
SIPPs and other personal pensions became regulated by the FSA on 6th April 2007, under the permission of “establishing, operating and/or winding up a person pension scheme”.
The recent FSA report concludes that poor compliance with regulatory requirements has resulted in the significantly increased risk posed by SIPP operators. The report identifies the following among SIPP operators who took part in the review:
- Several firms may have been used as a conduit for financial crime, as a result of poor corporate governance;
- Firms have been unable to identify investments that may attract a tax charge from HMRC;
- A poor understanding at senior management level of regulatory requirements;
- An increase in the number of non-standard investments (i.e. Unregulated Collective Investments Schemes) held by some SIPP operators;
- Operators holding insufficient capital, which is a direct risk to the on-going viability of the firm;
- A lack of evidence of adequate due diligence being undertaken for introducers and investments;
- Conflicts of interests; and
- A continued belief among SIPP operators that they bear little or no responsibility for the quality of the SIPP business they administer and that the responsibility lies with the clients and client advisors.
The FSA stresses within the report that SIPP operators are bound by Principle 6 : “a firm must exercise due skill, care and diligence in managing the business”, regardless of whether or not they provide advice. The FSA Handbook states that permitting transactions without a sufficient understanding of the risks involved is conduct which falls short of Principle 6.
SIPP operators are expected to consider the report and to review their business in light of its content.
There has been mixed reception to the report. Whilst some have welcomed the findings and recommendations, Andrew Roberts, Chairman of the Association of Member Directed Pension Schemes (AMPS) has been quoted as saying that the FSA is unfairly tarnishing SIPP operators as a result of mistakes made by advisors – “The issue may be on the side of the advisor. Are they doing enough due diligence? Are they pushing all their clients to one investment company? Or is it that they are being paid high commissions? These things are the advisor’s responsibility more than the SIPP providers” he is quoted as saying. He may have a point and the FSA does not appear to address this issue. What happens in a situation where a SIPP operator does everything it is supposed to but is unknowingly used, by a third party, to further financial crime or to avoid regulatory requirements? How far do SIPP operators have to go if they are not providing the financial advice themselves? Surely they need to be able to rely on advisors doing their job correctly? Having said that, it is clear that SIPP operators must ensure that they are complying with all their regulatory requirements as well.
SIPP providers and trade bodies are unlikely to agree with recommendations made by the FSA. However, the FSA will embark on a further consultation programme over the coming months. SIPP operators will have an opportunity to comment further on any proposals put forward by the FSA. How much notice will be taken of their comments? We will have to wait and see.