Happy Birthday to the SIPP
This week marks the 30th anniversary of the first self invested personal pension (SIPP).
The SIPP has come a long way since 1990, with changing and increased regulatory scrutiny and the creeping development of SIPP provider obligations. A lot has happened over the last 10 years or so since the first FCA (then FSA) paper on SIPP provider obligations was published. However, despite all the SIPP industry press and commentary there remains uncertainty and legal debate over many issues affecting SIPP providers.
We explore these issues in this legal alert – from the known knowns of FOS, to the known unknowns of the long awaited judgment in Adams v Carey, to the unknown knowns of ongoing SIPP due diligence and finally the unknown unknown – where will the SIPP be when it celebrates its 60th birthday in 2050?
What is a SIPP?
The SIPP was introduced by Nigel Lawson, the then chancellor, in the 1989 Budget and implemented by the Finance Act 1989. The government's intention was to allow customers greater choice over the investment of their pension contributions.
SIPPs were regulated by HMRC until April 2007 and permitted investments in a broad range of products, with the key exception being residential property. The advantage of a SIPP, like other pension products, is that there is no tax on the investment or capital gains made within the SIPP wrapper.
Most SIPPs today operate with at least 2 entities – a regulated FCA entity which operates the SIPP and a trustee entity which holds the assets within the SIPP as a bare trustee and is normally not FCA regulated. Some SIPP providers also operate with a third entity that is often not regulated by the FCA and administers the SIPP – collecting fees for example.
Entities within the SIPP structure are not regulated to provide investment advice; as a result SIPPs are not authorised to comment on the suitability of an investment for an individual customer. SIPP providers normally have contractual arrangements in place where they agree that the customer (or their financial adviser) can direct the SIPP to make certain investments, albeit that the SIPP retains the right to veto any given investment, for example, if the investment could lead to a tax charge on the SIPP.
The SIPP until A-Day
The first SIPP was sold in March 1990 and whilst uptake was initially slow, it was the implementation of the new pension tax regime under the Finance Act 2004 (also known as “A Day”) which simplified SIPPs. This led to the introduction of the SIPP as a mainstream pension product for consumers.
The changing regulatory landscape
The other key development in the mid-2000s was the transfer of the regulation of SIPPs from HMRC to the then FSA (now FCA). This took place in April 2007. The operation of a SIPP became a regulated activity as part of the FCA's remit over firms 'establishing, operating and winding up a personal pension scheme'.
At the time SIPP regulation moved to the FCA, the FCA Handbook did not set out the FCA's views on the obligations of SIPP providers, nor was any new guidance provided. Instead SIPP providers carried on in much the same way as they did when they were regulated by HMRC. In fact, there still remains no specific part of the FCA Handbook addressing SIPP providers.
Despite this, it did not take long before the FCA started to make noises in the SIPP market and make its thoughts known on what it expected of SIPP providers.
The first FCA intervention came in September 2009 as part of a Thematic Review . The FCA stated that SIPP operators “did not pose a significant risk to our statutory objectives” but went on to note that there was a “potential for significant customer detriment”. The 2009 Thematic Review noted the FCA's view that SIPP providers misunderstood their role and it was not the case that they bore little or no responsibility for the quality of the SIPP business that they administered.
A further Thematic Review Report was published in 2011 investigating whether SIPP operators had modified their practices in line with the 2009 Thematic Review . In the FCA's view there remained a lack of regulatory compliance, poor systems and control. Issues highlighted in the report included: (1) an increase in the number of non-standard investments held by some SIPP providers with poor monitoring of those investments and (2) a lack of evidence of adequate due diligence being undertaken on introducers and investments. At this stage the FCA said it expected SIPP providers to review their business, including paying attention to the evidence and quality of due diligence undertaken on introducers and investments.
Despite the 2011 Thematic Review stating that further guidance would follow later that year, no updated formal guidance was published until October 2013 . The 2013 guidance accepted that SIPP providers were not responsible for the advice given by third parties relating to the SIPP, such as investment advice from financial advisers, but the FCA expected SIPP providers to have procedures and controls in place to enable them to gather and analyse management information to in turn enable the identification of possible instances of consumer detriment and financial crime. The guidance referred to SIPP providers contacting members and the firms giving advice to ask for clarification where appropriate. The guidance also addressed due diligence / good practice for introducers and investments within SIPPs.
The 2013 guidance was followed with a Dear CEO letter to SIPP providers in July 2014 noting that failings in the FCA's eyes continued in the wake of the 2011 Thematic Review.