Out-Law News | 29 Apr 2014 | 2:49 pm | 3 min. read
The updated advisory note from the Financial Conduct Authority (FCA) comes after the regulator banned two partners of an advisory firm for failing to comply with its rules. It said that it had identified "serious and ongoing failings" by a number of firms since first identifying that firms were advising on transfers to SIPPs without assessing the advantages and disadvantages of the investments made by the new pension arrangements in January 2013.
"Customers have a right to expect an authorised firm to act in their best interests, yet the serious and ongoing failings found at firms have placed a substantial number of customers' retirement savings at risk," the FCA said in its alert. "We believe pension transfers or switches to SIPPs intended to hold non-mainstream propositions are unlikely to be suitable options for the vast majority of retail customers."
The regulator's investigatory work in this area is ongoing, and further enforcement action against firms and their owners is "anticipated", it said.
A SIPP is a type of personal pension plan which allows individuals to choose how their savings are invested from the full range of investments approved by the UK government and tax authorities. They tend to be particularly attractive for higher paid individuals. Contributions to a SIPP count towards an individual's annual allowance for tax purposes, while benefits paid out by a SIPP count towards an individual's lifetime allowance.
In its January 2013 alert, previous regulator the Financial Services Authority (FSA) said that firms were generally required to consider the overall transaction, meaning the investment vehicle and expected underlying investments, when giving advice on a SIPP or other product which was intended to act as a 'wrapper' or vehicle for investment in other products. However, the FCA said that some firms were continuing to restrict their advice to the merits of the SIPP alone following this alert.
"We think advising on the suitability of a pension transfer or switch cannot reasonably be done without considering both the customer's existing pension arrangement and the underlying investments intended to be held within the SIPP," the FCA said in its updated alert.
"In the cases we have seen, customers' existing arrangements were invariably traditional pension plans invested in mainstream funds or final salary schemes, with the customer generally having no experience of non-mainstream propositions and many having very limited experience of standard investments. The new arrangements firms proposed were to transfer or switch the customers' pension funds to a SIPP, with a view to investment in non-mainstream propositions, which were typically unregulated, high risk and highly illiquid investments," it said.
Examples of high risk investments encountered by the FCA during its investigatory work were overseas property developments, store pods and forestry, it said. It noted that in many cases the understanding of these investments by the firm itself was very poor, "at least in part because of inadequate due diligence on the products and on the product provider".
Firms were also unlikely to have sufficient professional indemnity insurance in place to cover the advice that they were providing, the regulator said. More seriously, it also found some cases where firms were using business models based on treating all customers as 'insistent' or seeking execution-only services in order to avoid compliance with regulatory requirements, or adapting their business models to advice customers to take out Small Self-Administered Schemes, which are overseen by the Pensions Regulator, it said.
"It is ever more important, that advisers are robust in the advice they provide to a client who is looking to move their pension fund to a SIPP, particularly following the recent Budget announcements which are likely to lead to increased movement from standard occupational pension schemes in order to take advantage of the various new flexibilities," said pensions expert Mairi Black of Pinsent Masons, the law firm behind Out-Law.com.
"Advisers need to be thoroughly aware and cognisant of the underlying investment proposition intended to be held within a SIPP. If they are not, the FCA's view is that they should not offer advice on the pension transfer or switch at all as they will not be able to assess suitability of the transaction as a whole," she said.