FCA reforms may offer SIPP market clarity, consistency and consumer confidence

The regulator’s proposals, which are open for consultation (149-pages / 1.64MB PDF) until next week, also aim to alleviate uneven regulatory protections for pension scheme money and assets, resulting from how SIPPs are structured, according to experts at Pinsent Masons.

The FCA is proposing clearer due diligence requirements for schemes that give investors ongoing choice as to the investments in their SIPP, and for a Pension Scheme Money & Assets (PSM&A) regime to address gaps in regulatory requirements for SIPP schemes where the FCA’s client money and asset rules in the Client Assets Sourcebook (CASS) do not apply.

Under the proposals, operators of SIPPS that are designed to give consumers flexibility and choice about their SIPP’s investments on an ongoing basis would be subject to FCA rules setting out the regulator’s expectations for due diligence on such consumer-driven SIPP investments, and the third parties involved.

The FCA’s aim with its proposed changes is to help improve consistency across this part of the SIPP market and reduce the risk of consumers being exposed to scams, fraud or bogus investments. The FCA considers pre-selected investments to be less of a target for such risks, so the proposed due diligence requirements would not apply to model portfolios and other firm selected investments.

While not imposing an obligation on SIPP operators to assess the suitability of an investment for a particular consumer, with the due diligence proposals the FCA is aiming for what it refers to in the proposed rules as ‘harm avoidance’, while taking a proportionate approach.

Schemes that are potentially higher risk due to consumer driven investment propositions would be required to carry out due diligence on such investments and ‘relevant third parties’ involved, including introducers and discretionary investment managers.

The proportionate approach is reflected in the calibrated due diligence requirements the FCA proposes. SIPP operators would carry out core due diligence for all investments they are instructed, by or on behalf of a consumer, to arrange to acquire for the scheme they operate. There would be a requirement for additional due diligence on those investments the FCA considers to be more susceptible to use in fraud and scams, with the FCA consulting on this approach and the asset categories to which the core and additional due diligence would apply.

Similarly, with respect to third parties, the FCA is proposing a tiered approach, so SIPP operators would carry out core checks on all relevant third parties with additional checks where their risk profile may be higher, if they are unauthorised or overseas for example. The due diligence would be carried out on an initial and ongoing basis, with terms of business with third parties documenting the relationship and respective responsibilities.

Simon Laight, a pensions expert at Pinsent Masons, said: “At a practical level the due diligence proposals may create compliance issues for firms, where investments are more esoteric or overseas, for instance.

“An unintended consequence may be that the due diligence proposed constrains the range of investment opportunities consumer-directed SIPPS invest into, rather than preserving, with an element of ‘harm avoidance’, the flexibility and scope the FCA wanted to maintain.

“The SIPP operator determines the additional due diligence to carry out, both on consumer driven investment assets and on the third parties involved, with the FCA expecting firms to take reasonable steps to independently verify information and documents they rely on. So the onus in these proposals is very much on firms,” he added. “Although such proposals are intended to clarify and raise the bar for SIPP operators’ due diligence process, they present questions for firms, both as to the extent and practicalities of compliance.

“For sophisticated scams and fraudsters, due diligence checks by firms may also not necessarily be an insurmountable deterrent. So such scams and frauds could continue to be a risk for consumers that firms are unable to ‘due diligence away’,” warned Laight.

The PSM&A requirements would be for SIPPS using a structure outside CASS to handle and hold pension money and assets, such as an unauthorised trustee.

The PSM&A would seek to level up this regulatory discrepancy by introducing enhanced record-keeping, reconciliation and oversight requirements designed to improve day-to-day controls and reduce the risk of consumer harm if firms fail or wind-down by making it easier for assets to be identified and transferred. Firms would be required to allocate oversight of the regime to a senior manager accountable for the firm’s compliance with the PSM&A rules and reporting to the firm’s governing body.

To prevent regulatory overlap, the PSM&A will not apply to pension scheme money or assets held by a SIPP operator already subject to CASS.

“With these proposals from the FCA for investment due diligence and the PSM&A regime, the regulator is seeking to iron out inconsistent approaches in these areas by firms in the SIPP market, and bolster the existing regime with detailed rules to drive up standards and address areas where there are risks for consumers,” said financial regulation and enforcement expert Jonathan Cavill of Pinsent Masons.

“In the consultation paper the FCA included strengthening its supervision and enforcement capability among its aims for the proposed due diligence rules, saying the proposed rules would help with consumer redress, including from the Financial Services Compensation Scheme.

“These more detailed rules may also make it easier in future for the Financial Ombudsman Service to identify where firms did not meet the regulatory requirements when determining complaints,” he added.

The consultation follows the FCA’s December 2024 discussion paper on the future regulation of the SIPP market, which has grown significantly in recent years. SIPPs accounted for nearly a third of assets held in FCA-authorised defined contribution pensions by 2024.

Laight said: “Industry reaction has been mixed. While some have welcomed the FCA’s attempt to provide greater clarity, others have questioned whether the proposed rules strike the right balance between consumer protection and maintaining the flexibility that has underpinned the growth of the SIPP market.”

Cavill added: “The rules and timelines resulting from the consultation will dictate the timeline for in-scope firms to implement relevant requirements, and the FCA is already making clear there is potential here for liability and enforcement risk for those that fall short.

“So in reviewing the consultation, which is shortly drawing to a close, SIPP operators should focus on the scope of their potential future obligations to assess the practicalities of compliance by their business within the proposed timeframes, and respond soon to the FCA with their views, if they wish.”

The consultation period closes on 24 August. The FCA aims to publish a policy statement and final handbook text in early 2027.