Pensions Ombudsman highlights need for thorough SIPP due diligence

The PO has rejected a complaint by a Ms R, who had claimed her SIPP provider had not carried out sufficient due diligence when it allowed her to invest £120,000 in a loan note issued by Renewable Land Resources Ltd (RLR). The loan note subsequently defaulted, and she lost the majority of its value. Ms R also complained that the SIPP provider’s fees were too high, in light of the service levels received following the default.

Ms R invested in her first RLR loan note in March 2017 – worth £60,000 and paying 8% per annum interest with a two-year maturity period. In March 2019, Ms R’s loan note matured and was repaid by RLR. On 3 April 2019, Ms R signed a further application form and non-standard asset questionnaire to invest £120,000 in another loan issued by RLR, on the same terms as her first RLR loan notes.

Throughout this period, Ms R was advised by a regulated financial adviser.

In June 2019, the provider became aware that Companies House had issued a ‘First Gazette Notice’ for RLR due to overdue accounts. RLR blamed this on a clerical error, which was being corrected. In response, the provider temporarily put on hold any further investments by clients into RLR loan notes. However, in September 2019 RLR published a statement that said due to changes in the renewable energy market it would be suspending interest payments and capital redemptions for loan notes to allow restructuring. The value of Ms R's investment was ultimately reduced to £20,376.

In September 2020, Ms R’s financial adviser went into liquidation. A claim for fraud was submitted to the High Court in January 2021 by other investors against Ms R’s financial adviser and RLR.

Although the PO had sympathy for Ms R he did not uphold her complaint, ruling that that there was no maladministration by the provider either in its role as trustee or as a SIPP operator.

In relation to the provider’s trustee function, it was clear that the trustee was acting on an “execution only” basis.  The decision to invest had been Ms R’s and she had acted on advice from a regulated financial adviser. The PO noted that it was clear from the relevant documentation that Ms R was solely responsible for making investment decisions in relation to her SIPP, and the operator would not be held accountable for any subsequent investment loss. Ms R accepted this position by signing the application form and the questionnaire, and acknowledging the risks that a non-standard asset, such as a loan note, might entail.

The PO noted the SIPP operator’s obligation to conduct appropriate due diligence on the RLR loan notes and considered that this obligation had been fulfilled. He referred to the standards set out in July 2014, when a ‘Dear Chief Executive Officer’ letter (‘the CEO letter’) was sent by the Financial Conduct Authority to all CEOs of SIPP operators, which specifically referred to the need for due diligence on non-standard investment business to ensure that assets allowed into a pension scheme were appropriate.

The operator carried out extensive due diligence checks on the RLR loan notes between 2016 and 2019, which were found to satisfy the standards set out in the CEO letter, and also carried out due diligence on RLR’s existing relationships with energy and recycling project developers - ensuring, as far as possible, that the contractual arrangements with RLR were legally enforceable and correctly drawn up. It also randomly selected clients to check that previous RLR loans notes had paid interest and repayments on time.

The provider had also taken steps to verify that Ms R’s confirmation that she was a high-net-worth individual and/or sophisticated investor was correct, noting that she had held several senior roles in retail banking during her career.

The PO concluded that the due diligence checks carried out had been “adequate and reasonable”. The operator’s role was not to stop Ms R from investing in high-risk investments, particularly as she had confirmed that she was a high-net-worth investor and had been advised by a regulated financial adviser.