ALMOST three decades ago, the self-invested personal pension (Sipp) was born.
Their investment flexibility was a key differentiator when compared to traditional personal pensions and this freedom struck, and continues to strike, a chord with investors.
By 2014, the Financial Conduct Authority (FCA) estimated that £100 billion of assets were administered through Sippss. In the first year of the Freedom and Choice reforms, data collected by the Association of British Insurers showed that £6.1bn had been invested in drawdown products alone.
While the rise of Sipps to become a bona-fide, mass-market product has been nothing short of spectacular, there have been, as is often the case in any rapidly expanding industry, examples of bad practice in certain minority sectors of the industry.
Tarnished. Crisis, or, more accurately, quiet crisis. Mis-selling. Just some of the headlines that have appeared this year in the financial trade press. The background context has been that some Sipp operators have been willed, or indeed encouraged, the facilitation of speculative, high-risk investments that can sometimes lead to pension savings being lost in their entirety.
But this is not a new problem. This issue has been in the making for some time. As far back as 2014, the FCA found in a thematic review that Sipp operator failings were “widespread” and ultimately put “consumers’ pension savings at considerable risk, particularly from scams and pension fraud”. Pretty scathing stuff.
It is therefore no surprise that there has been a subsequent rise in the trend of compensation statistics. The Financial Ombudsman Service received more enquiries in the first nine months of 2017/18 than the whole of 2016/17. And the compensation amounts paid by the Financial Services Compensation Scheme for Sipp-related claims has increased by 35 per cent between 2015/16 and 2016/17.
Following a few high-profile cases, it will soon be the courts that decide to what degree Sipp operators can be held to account where they have facilitated inappropriate and failed investments. The latest twist in the plot has seen the FCA be allowed to give evidence in the capacity of an interested party in two court cases. It is expected that the regulator’s interpretation of the regulatory regime will again make it clear that Sipp operators have more of a duty to vet investments than these operators believe.
Those Sipp operators hoping to rely on a defence based on ‘buyer beware’ are likely to be exposed, and potentially held accountable for client losses relating to speculative, high-risk investments.
Having said that, regulatory clarity is always a good thing. It is ambiguity that has allowed some providers to sail close to the wind and become implicit in pension savings being lost. The harsh truth is that a small group of Sipp operators did not take heed of the thematic review mentioned earlier.
The FCA raised the bar further in September 2016 by requiring Sipp operators to increase their capital reserves in proportion to their assets under administration and the number of Sipps they administered that held non-standard assets.
So there have been a number of measures throughout recent years that have already reduced Sipp operators’ appetite for accepting out of the ordinary assets. The latest developments should only reaffirm that this was the correct position to take.
A handful of Sipp operators will certainly fail, and indeed some already have, and these have generally been the players that did not adopt the same level of prudence as many of their competitors. In terms of the overall market, these will be the few rather than the many and will lead to a much-needed clean-up.
The good news going forward is that greater provider responsibility will mean consumer protection is vastly improved. This might just mean that the remarkable Sipp growth story is not finished yet.
Lee Halpin is technical manager at @sipp.
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