Graham Muir: Non-standard assets and the impact on SIPP due diligence

It has been a rocky year in the SIPP world, with providers landing in hot water for their exposure to “toxic” assets, writes Graham Muir. Here, he reminds advisers why it is worthwhile being selective when choosing a SIPP provider

The hot topic currently within the self-invested personal pension (SIPP) world is ‘non-standard assets’ (NSIs) and more particularly the rise to prominence of the so called ‘toxic’ NSIs that have featured in the recent Berkeley Burke High Court case and will rear their head again in the forthcoming Carey Pensions case.

The importance of these cases cannot be overstated and, while Berkeley Burke have indicated their intention to appeal the High Court ruling, the climate is changing fast – the Financial Conduct Authority (FCA) issued a ‘Dear CEO letter’ to all SIPP providers, telling them to consider the implications of the Berkeley Burke case on their business and reminded them of their duties and responsibilities to their underlying clients. This has been followed up with information requests, focussed on highlighting those providers with high exposure to toxic assets and seeking to understand which companies may be in financial trouble as a result.

Advisers could be forgiven for wondering which SIPP provider is ‘safe’ and which may have stored up significant issues which are only now coming to the fore and may have a seriously detrimental effect on that firm’s service standards and, in some cases, viability. As an aside there is also the reputational damage of an adviser having recommended a particular provider only to discover that ‘under the bonnet’ lies a morass of toxic assets and attendant complaints and legal actions.

We have already witnessed some significant firms being sold, in some cases such activity being driven by their high exposure to toxic assets and the attendant problems that these cause. There has undoubtedly been a short-term view taken by some providers to go for growth at the expense of proper checks and balances on the SIPPs they have historically written. In some cases providers appeared happy to accept SIPPs brought to them by unregulated introducers who have since fled to the hills, leaving the SIPP provider as the last man standing and, in the eyes of the FCA, responsible.

The problems faced by those providers with high exposure to toxic assets are manifold and should be seriously considered by advisers when looking at their preferred firms. Where a firm has a high concentration of clients in a particular, ‘cause celebre’ investment (e.g. Ethical Forestry, Elsyian Fuels, Harlequin etc.), then this is highly likely to lead to a raft of claims being brought against that provider. We are already seeing prominent claims management companies and legal practices seeking to represent large numbers of affected clients in class actions against SIPP providers that accepted this type of business and these actions are set to increase as consumers and the mainstream press pick up on the issues.

Handling large numbers of claims is a massive drain on resources for a provider and will inevitably detract from the quality of their day to day administration service. Operating costs will rise dramatically as the costs of defending legal actions and complaints hit home. There will be further pressure on costs in the form of higher professional indemnity premiums and increased regulatory levies, coupled with a potentially crippling level of capital adequacy required as direct result of high exposure to NSIs. It is not just costs that will impact on profitability, it also likely that, for the affected firms, turnover will flatline or reduce as advisers seek alternative providers.

So what is to be done to remedy the situation? How can advisers be confident in their selection of SIPP provider? The solution partly lies in an open, uniform disclosure of what is ‘under the bonnet’ of each SIPP provider.

We were pleased to see that Tavistock Investments’ James King recently called for this and we fully support his sentiments. Aside from the customary questions that advisers raise as part of their due diligence on SIPP providers, we believe that a set of standard questions, specifically focussed around NSIs and capital adequacy should be agreed by the industry and every SIPP provider should supply their responses to these questions when asked to do so. The data should also be built into the industry surveys of the SIPP market and, thereby, be in the public domain. We have devised a list of questions (together with our own responses) that we believe will provide advisers and consumers with a much greater insight into a provider’s exposure to these problem issues. This is now available as part of our due diligence pack and we urge the industry to follow suit and provide a clear and uniform approach to this issue.

Graham Muir is director at Talbot and Muir