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A Portfolio Letter for SIPP operators – are the goalposts being moved again?

23 May 2023. Published by James Parsons, Associate and Rachael Healey, Partner

The Financial Conduct Authority (FCA) published a Portfolio Letter for SIPP operators setting out "old" concerns and arguably introducing new expectations under the Consumer Duty. The letter is likely to leave SIPP providers feeling uneasy about what is expected of them going forward and what the new Consumer Duty means for their business.

A bit of context

In March 2020 we marked the 30th anniversary of the SIPP and noted ongoing uncertainty for the SIPP industry in respect of the increasingly onerous but vague due diligence obligations relied upon by the FCA and consequently the Financial Ombudsman Service (FOS) in its consideration of complaints concerning alleged due diligence failings. 

At the time we identified increasing complaint volumes at FOS and an uphill battle for SIPP providers faced with complaints relating to pension losses, typically upheld by FOS on the basis the SIPP provider carried out inadequate due diligence on the investments permitted within the SIPP and/or those introducing business to the SIPP (whether regulated or not).  FOS at that time was illustrating increasing reliance on the High Court decision in Berkeley Burke Sipp Administration Ltd v Financial Ombudsman Service Limited [2018] (a case involving an unsuccessful judicial review of an Ombudsman decision) as the jurisdictional basis for it upholding due diligence complaints against SIPP providers based on non-compliance with the FCA Handbook Principles – in particular Principle 2 requiring firms to conduct business with due skill, care, and due diligence – by reference to the supposed standards set out in various non-binding FCA publications (some often post-date the events complained). 

Fast forward to May 2023 and the position remains arguably largely the same with more FOS decisions including that involving Rowanmoor on which we have reported before with SIPP providers continuing to face an uphill battle fighting complaints at FOS and FOS arguably developing its own views on the content of SIPP provider due diligence duties.  The next issue for SIPP provider is will the Consumer Duty change all that again when it takes effect from 31 July, introducing new Principle 12 into the FCA Handbook and what has been referred to as increased standards for all those within the FCA's regulatory perimeter.

What is new in the latest letter? 

In the 8-page letter, the FCA sets the tone by noting it continues to see problems relating to historic issues, and its concerns have been heightened by more firm failures "often after FOS decisions have identified failings".  The FCA summarises the key harms as being:

  • Firm failures causing disruption of service for customers (this may have played a part in the timing of the letter);
  • Consumers not receiving fair redress when it is due (or not receiving redress in a timely manner), particular in relation to due diligence issues;
  • Pension scams and frauds and consumers being allowed to make investments that should not be accepted in SIPPs, including non-standard assets which fail or become illiquid.

These concerns were raised in the previous 2020 Portfolio Letter, but the FCA now goes further in setting out its expectations as to how SIPP providers should address the key harms as the Consumer Duty takes effect:

1. Redress liabilities – applying the Consumer Duty (retrospectively) to complaints handling process 

The FCA notes there are a significant number of outstanding due diligence complaints at FOS. The FCA expects SIPP providers to, amongst other things, ensure consumers receive redress promptly, conducting a root cause analysis of complaints and where systemic issues are highlighted "take whatever steps are necessary and (from 31 July 2023) meet the requirement to act in good faith towards those customers". The FCA "expect to see a significant change in firms' behaviour towards upheld complaints as a result to meet the requirement to act in good faith".  The Consumer Duty is not intended to be retrospective – but it may work that way via the backdoor given the way the letter assumes it should be applied to complaints when the business the complaint relates to pre-dates the implementation date of the Consumer Duty.

2. Financial resources – the need for "objective" and "accurate liability modelling"

Connected to the FCA's apparent frustration at firms fighting FOS complaints is its concern with liability modelling (the two being intertwined given firms may not agree with the FCA / FOS' view on liability).  The FCA takes issue with how firms are assessing their exposure, suggesting that firms "refuse to model liabilities in an objective way" by adopting "unrealistic assumptions" that complaints will be time-barred or that liability can be apportioned with another regulated firm involved in the chain. 

3. Due diligence – continued uncertainty on what is required

The FCA re-emphasises its position on due diligence and confirms that SIPP providers should continue checking and monitoring introducers as well as assessing whether investments are appropriate for a pension scheme (even though none of these "obligations" are set out in the FCA Handbook).

The letter explains that firms can comply with due diligence obligations under the new Consumer Duty by "continuing to undertake appropriate, robust due diligence to achieve good consumer outcomes"; it does not suggest rejecting investments but "contacting clients to inform them of any issues identified" so that they can consider their position and seek further guidance or advice as required.  This is somewhat inconsistent with how FOS approach most due diligence complaints, as FOS instead find that SIPP providers should simply reject the business altogether and not contact the clients about the issue – FOS typically rejects a suggestion that an investment would have been made anyway by a customer, but the letter would appear to open the door to these arguments.

The letter also reports on the FCA's recent review of 30 firms' due diligence procedures in relation to investments, introducers, and discretionary investment managers (DIMs). The regulator found that firms were failing to, amongst other things, carry out adequate checks on investments made by the SIPP through DIMs, review assets managed by DIMs on a regular basis, and put in place appropriate contractual arrangements with DIMs to guard against prohibited investments being made in the DIM portfolio. 

Implementing the Consumer Duty

 In addition to repeating and seemingly adding to the FCA's due diligence expectations of SIPP providers, the Portfolio Letter gives an indication of what the FCA expects of SIPP providers when implementing the Consumer Duty as both manufacturers and providers of a product (i.e. the SIPP). 

This includes the FCA's expectation that SIPP providers identify their target audience and "operate robust product governance processes to prevent those individuals who are not suited to their product from accessing it". There is therefore an indication that firms may need to exclude customers from the target market if they may suffer foreseeable harm or not receive fair value, for example as they do not need the full flexibility a SIPP offers.  However, as with much of the guidance around the Consumer Duty across different areas, there is no indication as to what factors need to be considered, and/or how to measure suitability (such as, for example, a minimum pension pot size) and this is particularly difficult where SIPP providers do not have investment advisory permissions to assess some of the factors that the FCA may consider relevant. 

It is also suggested that SIPP providers must consider adviser and investment charges as part of their consideration of 'fair value' under the Consumer Duty, so it is not enough for SIPPs to consider their own administration fees. The FCA signs off with a threat of enforcement if there is evidence of non-compliance with the Consumer Duty noting it "will target our supervisory focus over the next year and going forward on firms where there are indicators and/or evidence of failings relating to the obligations and expectations above". 

What now?

 SIPP providers are likely to be concerned by the implications of the latest Portfolio Letter.  For example, when it comes to identifying a target market it is easy to foresee a situation where too narrow a market means difficulties in attracting business and costs in monitoring the application of the target market (letting someone through may be a reason for FOS to uphold a complaint as well), whereas too wide a market in the FCA's eyes could lead to enforcement action for breach of the Consumer Duty.

The FCA expects a lot of SIPP operators with arguably little leeway and little reward. 

Then we have the continuing evolution of SIPP provider due diligence obligations, as we note, there is arguably a contradiction between what FOS require – reject the business if the investment is "unsuitable for a SIPP" and what the Portfolio Letter says – inform the customer of the risks – and then there is a potential friction with the fact the SIPP provider does not have regulatory obligations to give investment advice.  Berkeley Burke was the first challenge of a FOS decision involving SIPP provider due diligence duties and there is a further challenge later this year according to the Court of Appeal website.  

Where the story ends remains to be seen – but what is clear is that all industries will be monitoring the implementation of the Consumer Duty both by the FCA and FOS – and none more so than SIPP providers.