July 2007

Part of the process

The regulation of personal pension schemes from 6 April 2007, and the consequent regulation of the market for self-invested personal pensions (SIPPs), has brought significant changes to advice requirements for investment into SIPPs. It has not affected which investments are available (although it may in the longer term), but it does change the process required in many cases.

Before 6 April, SIPP advice was unregulated. This meant, for example, that if an adviser recommended that a client should include a commercial property within a SIPP that advice was technically not regulated. There was no FSA requirement for a fact find or suitability paragraphs relating to that investment, or indeed for any commissions payable to the adviser to be disclosed.

However, within a SIPP there might well be investments that were regulated in their own right. An example of that would be insurance company funds in a 'hybrid' SIPP. Because they were regulated investments, advice on placing them within the SIPP was also regulated.

However, since 6 April advice on all investments held within a SIPP has become subject to regulation so even advice on assets that would normally be unregulated does become regulated as soon as that advice relates to a SIPP. Again, commercial property would be a good example, and the FSA will expect the same standards of advice and documentation for these investments as for insurance company funds.

At first glance, the rule may seem straightforward even if meeting it in practice may not be. However, there are grey areas which the FSA has covered in 'perimeter guidance'. This is included in Appendix 1 of the Policy Statement on pension scheme regulation - PS06/7, published in September 2006. Significant guidance from this includes:

- Appointing a discretionary investment manager to act on behalf of a client is not regulated advice because the adviser is not giving investment advice

- Making a general recommendation that a SIPP is an appropriate vehicle for a particular unregulated asset (for example, a commercial property) is not regulated advice.

- As soon as the advice relates to placing the asset in a specified SIPP the advice becomes regulated, unless the adviser is only providing information on the tax or legal consequences of the action.

- Instructing scheme trustees to obtain a mortgage to purchase a particular property to hold within a particular SIPP is a regulated activity, but the advice given to the member on the mortgage itself is not regulated. This is because tax rules do not allow a SIPP member to hold property under a pension scheme for his or her personal use.

This is a complicated area with many traps for the unwary. Advisers need to be clear about what advice is regulated and what is not. It would be wise to play safe when in any doubt and assume that advice is regulated. This will involve some extra work, but avoids the possibility of falling foul of the FSA.

So what does it mean if advice on an investment is regulated?

The first requirement is that the adviser must be competent to give advice on the asset class involved, or sub-contract that element to someone who is. For example, in the case of commercial property it may be wise to bring in an estate agent or other relevant professional.

There is also the requirement to undertake research and analysis to the same standard as for regulated investments. This will include being clear about why the investment recommended is more suitable for the client than other alternatives.

A third area is documentation. Again, this needs to be to the same standard for unregulated investments held within a SIPP as for those that are regulated in their own right. The adviser's personal files will also have to be comprehensive for these investments.

Finally any payments the adviser will receive on any investments within a SIPP must be clearly disclosed. In the past there have been some investment types, for example limited liability partnerships for property purchase, where advisers have received commission payments that were not disclosed to clients because they did not have to be. That is no longer an option.

For some advisers, regulation of SIPPs will have little impact apart from benefiting from the tighter disclosure rules that apply to scheme operators. They have always treated SIPP investments as though they were regulated as a matter of good practice. However, there are other advisers for whom this is a significant change, and who may need to reconsider their advisory model and their competence to become involved with different asset types. Advisers also need to be wary about suggestions of how they might be able to get round the rules, for example by classing clients as sophisticated investors. There is no doubt that the FSA will pay particular attention to SIPP advice over the coming months, and is likely to come down hard on those who are seen to be circumventing its requirements.

Protected rights

I said at the start of this article that regulation could change the investments available under SIPPs in the longer term. That comment refers specifically to protected rights arising from contracting-out of the State Second Pension (what used to be SERPS). Self-investment is not currently possible for protected rights in most SIPPs. The Department for Work and Pensions has reviewed that situation several times without changing it, but a further review is likely once SIPP regulation has bedded down. If this provides enough reassurance to convince the DWP that there is sufficient security for protected rights benefits within SIPPs, the current prohibition may be lifted. However, that is likely to be some time away.

At present self-investment of protected rights is only possible where the arrangement is a 'contract of insurance', which is covered by the regulation applying to insured personal pensions with more onerous requirements on, among other things, disclosure of the effects of charges. Unless and until the investment regulations for protected rights change, these will be the only vehicles allowing wider asset choice for the substantial protected rights benefits held in pension arrangements.

Ian Naismith
Head of Pensions Market Development
Scottish Widows