Martin Tilley: SIPP-related compensation claims on downward trend

Martin Tilley addresses the FSCS’ latest demand for £24m extra funding due to “SIPP related” claims - something he believes could be coming to an end very shortly…

Understandably, paying for others’ mistakes is a pill that all decent minded people find difficult to swallow and this has been apparent from intermediary comments to articles following the publication of the Financial Services Compensation Scheme (FSCS) January’s Outlook edition.

 Industry press has been alive to the need for additional funding for the intermediaries class to the tune of £23.9m.

 While several publications lead with headlines that this extra levy is due to “rising SIPP claims”, the detail included in the publication offers some degree of comfort. It states that “the overall expected compensation costs for the year have reduced” and that although total claims for the class were up 4%, the average cost of each self-invested personal pension (SIPP) related claim had reduced from £30,000 to £23,000.

Scant comfort it may be, but we have to examine where we stand with these claims; how the SIPP industry has repositioned itself; and the measures that are now in place to ensure the trend for “SIPP related claims” is downward.

 Looking back

The majority of claims seem to have originated during the period 2009-2013 and covered a wide range of investment propositions including but not limited to biofuel plantations, overseas off- plan hotel rooms, storage pods and such like. 

This coincided with a distinct growth in the number of SIPP operators in the market during that period, which followed two other industry milestones: the direct regulation of SIPPs by the Financial Conduct Authority (then the Financial Services Authority) and the removal of the HM Revenue & Customs permitted assets list following the introduction of the new pensions tax regime in 2006. 

I would suggest the latter opened the door for the inclusion within SIPPs of the assets, which have led to the current level of “SIPP related” claims.

With multiple new entrants to the SIPP market and therefore a need to obtain critical mass, some operators paid away client funds in return for assets, which in all honesty did not stand up to detailed scrutiny. 

The regulator has addressed this issue with the publication of findings from its three thematic reviews. The last review concluded with a letter to SIPP CEOs in July 2014, making it very clear what the regulator expects of SIPP operators. Woe betide any SIPP operator accepting assets on which detailed due diligence has not been undertaken since this date.

It seems that despite calls, we are unlikely to see the reintroduction of a permitted asset list. I have my doubts whether any such list would achieve the total success we might hope as we have already seen “packaged bonds”, the underlying assets of which resemble those that are the subject of current claims. However, if the authorities were to reintroduce such a list, it ought to be less restrictive for high net worth or sophisticated investors.

The FCA has also focused on the source from which new business arrives at the SIPP operator. The majority of new business, certainly to full SIPPs, is advised and through regulated intermediaries. While this should not diminish the responsibility held by SIPP operators, they should be extra vigilant on any business they might accept from unregulated intermediaries or from direct, non-advised individuals.

So, hopefully, the source for any investment triggering a new claim has been closed but there remains a raft of investors still holding these assets whose claims are potentially still to be processed.

No win no fee

An unfortunate catalyst is the claims handling “ambulance chasing firms” offering “no win no fee” who encourage claims to be made. In some instances, these firms actively seek out claimants and build a case perhaps where the claimant might have initially considered themselves at least partially at fault.

We can, therefore, expect the number of “SIPP related” claims to remain high for the next six to 12 months, following which, I would hope that the number and therefore any levy related to such claims will fall.

Indeed, a recent Financial Ombudsman ruling, albeit for a failed small self-administered scheme rather than SIPP investment, found no grounds for the complaint to be upheld. The adjudicator concluded that the claimant having lost money “is seeking to recover those funds by whatever means possible”.

 Martin Tilley is director of technical services at Dentons Pension Management