It is a “no-brainer” to re-introduce permitted investment lists for SIPPs to protect consumers and take pressure off of the FSCS, according to Prudential head of business development Vince Smith-Hughes.
Permitted investment lists used to be a feature of self-invested personal pensions (SIPPs) but were scrapped in 2006 when pension simplification rules were introduced.
According to Smith-Hughes (pictured), the set of rules worked well. However, the then-Labour government scrapped the mechanism, instead saying investors could invest their pension in whatever they liked, though some things would be taxable.
As a result, there was a rise in investments in unregulated schemes that offered investors the chance to put money into the likes of Store Pods and off-plan overseas properties. Typically, these investments were high risk and many have failed.
The Pru head of business development says it is worth re-examining introducing a permitted list of some sort. He is of the opinion it would benefit consumers, advisers and the industry.
“If we go back to something like a permitted investment list, I think there are four absolutely key advantages,” he says. “First and foremost, you’ve got better consumer protection, because you’ve got an absolute line in the sand that says ‘you can’t invest in these things’.
“Secondly, you take pressure off the Financial Services Compensation Scheme (FSCS), because ultimately, that is where a lot of these companies end up. Thirdly, you help to avoid scams. Also, it gives advisers and SIPP providers absolute clarity of what they can do. To me, it feels like a no-brainer and we should definitely take another look at it.”
Millions in compensation
In the 2018/19 financial year, the FSCS shelled out £123m in SIPP-related compensation. Advisers stump up the majority of those costs.
Many SIPP providers have found themselves in hot water in recent years after allowing investors to put money into unregulated schemes that have since failed. In June, for example, GPC SIPP entered insolvency after fighting a raft of claims and complaints made against it in relation to investments in the Harlequin property scheme.
Dentons Pension Management technical sales director Stephen McPhillips agrees, in theory, that the reintroduction of a permitted investment list for SIPPs would provide clarity for advisers and clients. However, he believes that, because of the broad range of investments available, it is “virtually impossible” to create a list that covers every eventuality.
He explains: “A broad heading of ‘unregulated collective investment schemes’ on a permitted investments list would not in itself mean that clients could access all such investments. This is because responsible providers will wish to undertake their own due diligence on any proposed investment of that type and may or may not allow it into their SIPP.
“Similarly, a category of ‘unquoted shares’ on the list would not mean that all unquoted share investments would be acceptable to providers, because each should be carefully considered on its own merits.”
McPhillips adds: “Clarity within the SIPP industry is always to be encouraged and welcomed, especially in light of the current court cases, but unfortunately a permitted investments list would not negate the current need for providers to operate robust due diligence processes when screening certain investments.”
Group communications director of SIPP firm Curtis Banks Greg Kingston, meanwhile, feels there are certain dangers that could come with re-introducing such a list.
“One problem is that it risks putting the responsibility back on a regulatory or legislative body to determine what’s allowable, in a far more prescriptive way than the current HM Revenue & Customs guidelines on taxable/non-taxable – there’s probably little appetite for that kind of responsibility,” he says.
“The danger is that less savoury investments are still promoted, and they’ll be promoted as being ‘safe’ as they’re permitted investments, and that could result in a new wave of mis-selling and poor consumer outcomes.”