Stephen McPhillips: Due diligence is ‘crucial tool’ in the box

Stephen McPhillips explores due diligence in financial services with a specific focus on the SIPP market

Is it just me, or has there been much more use of the term “due diligence” in recent years? I’m referring to the financial services industry, as well as the world beyond that, and I don’t recall there ever having been so much reference to that term.

So, in the hope that it’s not just my perception, why would there be more of a focus now than was previously the case?

Financial services

Sticking with reference to our own industry, there’s hardly a day goes by when I don’t encounter a reference to due diligence. That might be a request from a financial adviser firm for information on my employer so that it can inform the research and recommendation material for clients, or it might be me making a request for information from an adviser or client on a proposed pension scheme investment.

Of course, due diligence is not a new concept and, whether or not that term was used widely in the past, some form of it will have been in action over the decades within our industry. It’s the extent to which it has (or has not) taken place that has shaped some more recent events; more on that later.

One of the reasons why we might be making more use of the term could be down to the abundance of easily available information these days – it only takes seconds to access an internet search engine to call up endless pages of information on a given topic. I’m old enough to recall there being no email facilities, never mind access to a global information network!

The internet makes it far simpler now to conduct detailed research on, for example, a provider the adviser firm might be looking to recommend to (or review for) a client. That research might reveal a number of facts about the provider, including perhaps where its underlying profit is derived from.  

Another reason for increased levels of due diligence might be down to increasing regulatory requirements and pressures on advisers and providers. As an example, SIPP providers are required to report on their capital adequacy position on a quarterly basis to the Financial Conduct Authority. That data should consequently be readily available to adviser firms when quizzing a provider about its financial position as part of the adviser’s initial or ongoing due diligence on the providers he or she uses.

SIPP providers and due diligence

A cursory search on the internet along these lines will highlight the extent to which the term “due diligence” impacts providers of self-invested personal pensions.

There are two aspects to this:

  • adviser firms’ research into SIPP providers
  • SIPP providers’ due diligence on investments that it is asked to accept into its book

I have touched on some aspects of likely adviser due diligence on providers above. There will, of course, be more, depending on the firm’s compliance procedures.

In respect of providers’ due diligence on investments, the internet search will, sadly, reveal some worrying information on the extent to which some providers have historically carried out research on investments before allowing them to be made through their contracts.

Unfortunately, there are a number of providers whose due diligence on investments could be, and indeed has been, questioned formally and legally. Some of the fall-out from the lack of, or failed, due diligence by SIPP providers can be seen in their demise and the subsequent impact on the wider industry.

However, it’s not just provider due diligence on investments that has been called into question through the courts recently; we have seen a major issue with a provider failing to fully understand the possible impact of actions of an unregulated introducer of business to it.

Despite being heard in both the High Court and Court of Appeal, the Adams v Carey Pensions case may not yet have reached its conclusion and a Supreme Court hearing may be the ultimate determinant of the outcome of that case.

One thing is for sure in all of this; the amount of readily available information these days should mean that adviser firms can conduct effective due diligence on providers, which should hopefully demonstrate that not all are tarred with the same brush.

Stephen McPhillips is technical sales director at Dentons Pension Management