Out-Law News 2 min. read

FSA warns advisers to base advice on suitability of unregulated asset investments during pension transfers

Financial advisers tasked with transferring individuals' pension savings into investment vehicles such as SIPPs must ensure that they provide financial advice to their clients on the underlying investment schemes too, the Financial Services Authority (FSA) has said.

The regulator has issued an 'alert' to firms detailing its concern (2-page / 117KB PDF) that there are pension transfer practices in operation that are putting investors' savings at undue risk.

It said it had been made aware of cases where pension investors had been "introduced" to opportunities to invest their savings in "high risk, often highly illiquid unregulated investments", including in diamonds and overseas property developments, but had not been given advice about the features of such investments by financial advisers at regulated firms.

The regulator said it had taken action against a "number of firms" to prevent them from carrying out pension transfers "in this way" and that it is further considering whether to take enforcement action against those companies.

"It has been brought to the FSA’s attention that some financial advisers are giving advice to customers on pension transfers or pension switches without assessing the advantages and disadvantages of investments proposed to be held within the new pension," the FSA said in an 'alert' published last week. "In particular, we have seen financial advisers moving customers’ retirement savings to self-invested personal pensions (SIPPs) that invest wholly or primarily in high risk, often highly illiquid unregulated investments (some of which may be in Unregulated Collective Investment Schemes)."

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.

The FSA said that its investors may not be able to obtain any "recourse" should their investments in unregulated schemes fail. It said it had seen cases where individuals' savings had been "transferred out of more traditional pension schemes" into "unregulated assets via SIPPs" and that it was "often entirely unsuitable" for those individuals to be exposed to such levels of risk.

Financial advisers cannot merely provide advice on SIPPs or other "vehicles" to be used to package together investments but must also advise investors about the features of the underlying investments themselves, the FSA said.

"The FSA’s view is that the provision of suitable advice generally requires consideration of the other investments held by the customer or, when advice is given on a product which is a vehicle for investment in other products (such as SIPPs and other wrappers), consideration of the suitability of the overall proposition, that is, the wrapper and the expected underlying investments in unregulated schemes," the FSA said in its alert.

"It should be particularly clear to financial advisers that, where a customer seeks advice on a pension transfer in implementing a wider investment strategy, the advice on the pension transfer must take account of the overall investment strategy the customer is contemplating," it added. "For example, where a financial adviser recommends a SIPP knowing that the customer will transfer out of a current pension arrangement to release funds to invest in an overseas property investment under a SIPP, then the suitability of the overseas property investment must form part of the advice about whether the customer should transfer into the SIPP."

"If, taking into account the individual circumstances of the customer, the original pension product, including its underlying holdings, is more suitable for the customer, then the SIPP is not suitable. This is because if you give regulated advice and the recommendation will enable investment in unregulated items you cannot separate out the unregulated elements from the regulated elements," the FSA said.

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