“I propose to make it easier for people in personal pension schemes to manage their own investments” announced the then chancellor Nigel Lawson in his 1989 Budget speech paving the way for the creation of SIPPs. Their investment flexibility was a key differentiator when compared to traditional personal pensions and this freedom struck, and continues to strike, a chord with investors.
Fast forward to late 2005 when the then Chancellor Gordon Brown, in his infinite wisdom, led the market to believe that residential property would be allowed to be held in a SIPP.
This sparked mass euphoria among pension providers and advisers until a late change of mind from the Treasury put paid to this notion. However, even this U-turn failed to dampen the popularity of SIPPs. And today the SIPP remains a fast-growing, and mainstream, product in the UK pensions landscape.
By 2014, the Financial Conduct Authority (FCA) estimated that £100bn of assets were administered through SIPPs. In the first year of the Freedom and Choice reforms data collected by the Association of British Insurers showed that £6.1bn had been invested in drawdown products alone.
Boom and bust?
While the rise of SIPPs to become a mass market product has been nothing short of spectacular, there have been, examples of bad practice in certain minority sectors of the industry, as is often the case in any rapidly expanding industry.
In an attempt to address this, the Financial Services Compensation Scheme (FSCS) has only this year redefined the basis for claims for SIPP operators declared in default. Under this interpretation, defaulting SIPP operators who “failed to exercise reasonable skill and care, breached regulatory requirements and/or breached trustee duties” have created a civil liability to the SIPP investors.
Tarnished. Crisis, or, more accurately, quiet crisis. Mis-selling. These are just some of the headlines that have appeared this year about SIPPs.
While fully justified in their appraisal of providers, it is the context that matters most here. Notably that a clutch of SIPP providers have either willingly or actively encouraged, the facilitation of speculative, high-risk investments, and it is this behaviour that has in turn led to unfortunate instances of individuals pension savings being lost in their entirety.
Alas, this is not a new problem. Rather in the absence of any real nettle grasping from the regulator this ‘issue’ has been in the making for some time. As far back as 2014, the FCA found, in their thematic review, that SIPP operator failings were “widespread” and ultimately put “consumer’s pension savings at considerable risk, particularly from scams and pension fraud”. Pretty scathing stuff.
Hardly surprising then that there has been a subsequent rise in the trend of compensation statistics. The Financial Ombudsman Service (FOS) received more enquiries in the first nine months of 2017/18 than the whole of 2016/17. And the compensation amounts paid by the FSCS for SIPP-related claims has increased by 35% between 2015/16 and 2016/17.
Following a few high-profile cases, it will soon be up to the courts to decide to what degree SIPP operators can be held to account where they have facilitated inappropriate and failed investments.
The latest twist in the plot has seen the FCA allowed to give evidence in its capacity as an interested party in two court cases. It is expected that the FCA’s interpretation of the regulatory regime will again make it clear that SIPP operators have more of a duty to vet investments than these operators believe.
Those SIPP operators hoping to rely on a defence based on “buyer beware” are likely to be exposed, and potentially held accountable for, client losses relating to speculative, high-risk investments.
Sailing close to the wind
Having said all that, regulatory clarity is always a good thing. It is ambiguity that has allowed some providers to sail close to the wind and become implicit in pension savings being lost. The harsh truth is that a small group of SIPP operators did not take heed of the thematic review mentioned earlier.
The FCA raised the bar further in September 2016 by requiring SIPP operators to increase their capital reserves in proportion to their assets under administration and the number of SIPPs they administered that held non-standard assets.
So, there have been a number of measures throughout recent years that have already reduced SIPP operator’s appetite for accepting out of the ordinary assets. The latest developments should only reaffirm that this was the correct position to take.
A handful of SIPP operators will certainly fail, and indeed some already have, and these have generally been the players that did not adopt the same level of prudence as many of their competitors. In terms of the overall market, these will be the few rather than the many and will lead to a much needed clean up.
Despite this, the flexibility a SIPP can offer still remains unparalleled and its greatest strength.
The ability to tailor one product for varying client needs and objectives has made SIPPs an essential component of an adviser’s toolkit over the last three decades.
Greater provider responsibility along with vastly improved consumer protection can only be view as a positive development. This just might mean that the remarkable SIPP growth story is not yet finished.
Lee Halpin is technical director @SIPP