The future of SIPPs – FCA responds to the Work and Pensions Committee
A couple of weeks ago we reported on 5 pointed questions raised by the Work and Pensions Committee of the FCA in relation to the SIPP market. Those questions included whether or not the FCA was considering banning non-standard investments in SIPPs. The FCA has now responded. The response includes the FCA's views on the due diligence it expects of SIPP providers when it comes to non-standard investments.
Due diligence for SIPP providers
The FCA's response provides that in September 2017 only around 2% of assets under management "with the largest contract-based SIPP operators" were invested in non-standard investments (NSIs). This is said to be a total of £5.97bn against assets under management of £300.31bn.
The Work and Pensions Committee asked the FCA what due diligence SIPP providers are required to conduct on NSIs. The FCA has said "… we require firms to comply with our Principles of Business and therefore conduct their business with due skill, care and diligence. We also require them to treat their customers fairly. We do not prescribe an exhaustive list of factors they should consider as part of their due diligence checks as we believe firms need to ensure that are taking effective, appropriate action in each individual case. We do have rules in place which oblige SIPP operators to assess if there are problems with an investment and/or an introducer. By carrying out this due diligence they would be required to take appropriate action, which may include declining to proceed with the investment…".
The FCA then makes a reference to a "recent intervention in a civil court case" (being Russell Adams v Carey) and goes on to say what it expects of SIPP providers listing 4 due diligence requirements:
1. SIPP operators should take reasonable steps to ensure that they do not accept into
the SIPP an asset that is likely to give rise to tax liabilities.
This is likely to be relevant to situations where the SIPP operator purchases assets
from a member as this can lead to unauthorised tax charges if the asset is worth less
than the amount the SIPP pays for that asset. It would also apply where the
investment cannot itself be held within a SIPP.
2. SIPP operators have 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
3. 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 and 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.
4. 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.
Steps the FCA is already taking
The letter also refers to the FCA's enforcement powers and that there is one live skilled person review into a SIPP provider involved with NSIs. The letter also refers to a number of SIPP operators having offered and accepted voluntary requirements to cease accepting "higher risk" NSIs while they review their due diligence processes. Two SIPP firms are said to have been referred to the Enforcement and Market Oversight Division. There are also said to be 33 open investigations into advisers who the FCA is said to "suspect have given poor advice" and a further 4 advisers have been prohibited or banned from holding senior positions.
A ban on NSIs?
The letter confirms that the FCA is not "currently considering barring unregulated or NSIs from inclusion in SIPPs" as it believes "suitable advice from financial advisers accompanied with effective due diligence checks by SIPP operators is a more proportionate way of preventing harm to consumers rather than imposing a ban". The FCA notes that not all NSIs are high risk, referring to commercial property and fixed term deposit accounts as examples of NSIs that are not high risk. These assets are counted in the category of non-standard as they are not capable of being liquidated in 30 days but in relation to which the FCA says it would "not necessarily want to ban" for sophisticated and high net-worth individuals should they proceed on the basis of sound advice and consideration.
The letter is confirmation of the FCA's views on the due diligence requirements of SIPP providers and that a failure, the FCA considers, constitutes a breach of COBS that would be actionable under section 138D of FSMA. Notably the letter does not go into detail in relation to due diligence on referrers of business including unauthorised introducers. Instead the focus of the list of 4 due diligence obligations is on the investment itself. This is probably a product more of the questions raised of the FCA than an indication of the FCA's views on unauthorised introducers. What the letter does confirm is that the FCA has no plans to ban investments in NSIs. However it does confirm that what the FCA does not like is so-called "mainstream" investors investing in NSIs.
We doubt that this is the last we will hear on the subject with a number of court cases in this area in the pipeline.