The most recent self-invested personal pensions (SIPP) issue to hit the headlines revolves around investment liability.
Before writing this piece, I decided to carry out some basic research – in other words, I went on to Google and searched ‘SIPP’! The first three pages of results were awash with various providers promoting their site and products – these are likely the ‘paid for’ results.
However, if you go further, you will find some more ‘interesting’ results starting to creep in.
Some highlights I found include:
- Thousands more SIPP complaints to hit
- FSCS demands extra £24m levy due to rising SIPP claims
And my personal favourite…
- Been mis-sold a SIPP / Find out with our FREE test
Clearly, there is a significant issue in the industry and one which advisers must be careful to navigate.
So what happened?
Numerous experts, professionals and market commentators have chimed in with their own views. Sadly, the reality is that in many cases, unscrupulous individuals have taken advantage of the open nature of SIPPs to make money. The old saying is true – if an investment seems too good to be true, it often is.
Investments in unregulated overseas funds, tree plantations in Cambodia, ingenious green energy schemes (that turn out to be just a bit too ingenious), dodgy overseas property arrangements – SIPPs have been used to invest in them all.
High Court actions are underway as clients have either incurred losses or become aware of the risks they face. Legal firms have also sought to create publicity and are identifying group actions to prosecute. These assets are reported to be quite widely held by SIPP providers and the potential liabilities are eye-watering. This has potential to rock the SIPP industry.
Many providers offering bespoke SIPPs found it just too tempting not to open their doors to these investments (some perhaps actively facilitating them) to get lots of fee-paying SIPPs on their books. However, a more cautious approach was taken by some, avoiding or limiting exposure to non-standard investments (NSIs) in general.
The fallout from this could be significant and the exposure of a SIPP provider to potential liabilities should now be a key decision factor for financial advice firms in choosing which SIPP provider they work with.
What does this mean for a provider with these issues?
A SIPP provider that has clients with high levels of NSIs has a number of challenges.
- Capital Adequacy – This has been, and remains, a key issue for providers. This is the amount of money they must hold aside for each SIPP member in your book. If your client has any NSIs, the amount of ‘cap ad’ is multiplied considerably. Money held aside like this is costly and is unavailable for investment;
- Asset and complaint management – The time involved in dealing with the fallout from failed assets and handling the complaints that follow is significant. When coupled with the cost of appointing specialist legal counsel, firms holding these assets will see a material impact on the bottom line.
- Higher costs – High exposure to problematic assets may necessitate a need to raise fees for the reasons already alluded to.
- Market consolidation – in extreme circumstances a provider will need to find a buyer or die. Buyers are not exactly queuing up!
As an adviser, it is more vital than ever to take time to validate the financial and liability health of your preferred SIPP provider before passing your treasured clients to them.
And don’t be diverted by broad platitudes and warm smiles, go to the numbers, exact numbers!
Where is the market going?
Xafinity is committed to providing all the investment flexibility allowable to a full SIPP, but we have always been very, very careful to validate any proposed NSI through rigorous technical scrutiny.
It has now been over a year since anyone asked me personally about an unregulated overseas investment. I am occasionally asked about other forms of NSI such as unlisted company shares, however, we won’t touch such a deal without an FCA-regulated adviser, and we never have.
This might suggest that NSIs are disappearing from the SIPP market. So, hopefully, no future headaches to worry about – all good for providers, advisers and most importantly, clients.
SIPPs are great. They are hugely flexible and really effective planning tools for advisers to use. Be it SMEs looking to invest into commercial property, the simplicity of using a DFM or flexible access to benefits.
Yes, there are some real issues with potential big ramifications for some providers, and the ambulance chasers are trying their luck.
Arguably this will lead to a stronger SIPP environment for clients and advisers, but the route to get there is now a perilous one and advisers will do well to do their due diligence like never before.
Jeff Steedman is head of SIPP/SSAS business development at Xafinity