SIPPS – one way to achieve a brighter regulatory future?
If how to make SIPPs safer is the question, is permitted investments list the answer? Perhaps, says Mike Morrison, head of platform technical, AJ Bell
One of the pension issues that does not seem to go away is that of working to a permitted investment list.
In the early days of SIPPs we worked in line with Joint Office Memorandum 101 from the Inland Revenue, which defined the concept of ‘self-directed’ and gave us a brief explanation of what we could and could not do with regard to investments – dealing with ‘connected’ parties, for instance.
We came to know it as JOM 101; it was very much open to interpretation and grew by discussion and, to some extent, trial and error. This lack of definitive guidance led to something of an unsatisfactory situation where some SIPP providers would allow certain investments and others would not.
In 2001 we got the Personal Pension Schemes (Restriction on Discretion to Approve) Permitted Investments Regulations (SI 2001/117), which gave us a ‘list’ of permitted SIPP investments that essentially became the definitive list.
The list consisted of:
• Stocks and shares listed or dealt in on an Inland Revenue recognised stock exchange (including AIM but not OFEX).
• Futures and options, relating to stocks and shares, traded on a recognised futures exchange.
• Depositary interests.
• Units in most authorised unit trusts.
• Eligible shares within the meaning of section 638(11).
• Shares in an open-ended investment company.
• Interests (however described) in most collective investment schemes.
• Contracts or policies of insurance linked to insurance company managed funds.
• Traded endowment policies.
• Deposits in any currency held in deposit accounts with any deposit-taker.
• Freehold or leasehold interest in commercial property (including land) where the interest is acquired from any person other than a member of the scheme or a person connected with him.
This was a good starting point. Investment requests could usually be referred to the list and accepted or declined, although sometimes it was not so clear cut and some investments were engineered to fit into a particular category.
It was never a closed book and if a particular new investment type became available it was possible to open discussion with the Inland Revenue and seek acceptance. Key criteria included consumer protection should an investment fail, and a restriction that a scheme could not lose more than the individual investment.
In 2006, with the great pension simplification revolution, there was talk of a much more liberal regime with all sorts of esoteric investments, such as wine and residential property. Luckily it never happened.
Roll forward to 2016 and we are now told by the regulator that SIPPs offer one of the biggest regulatory threats. The FCA has done at least three thematic reviews on this, and the FSCS foresees a shortfall and the possible need for an extra levy on advisers. (The forecast numbers for SIPP claims is now £136m for 2016 to 2017 – this is up from £98m, an increase of 39%, less £12m brought forward from last year, leaving a shortfall of £29m.) At the same time, FOS is seeing a record level of SIPP complaints.
One point that is not totally clear is the type of SIPP claim that is being made (and anticipated). A good number could be for ‘administrative’ issues but I am sure the majority are in respect of investments that have been selected and have ‘gone wrong’. Hardly a week goes by without a story about a ‘SIPP permissible’ investment becoming subject to a claim/court case.
Why not revert to a permitted list of investments with those investments being covered by the FSCS – anything off that list would not be covered. Such a list would not solve every problem – I am sure there would still be incidences of fraud and plain business failure – but making sure that the allowable investments were of a specifically regulated nature could go some way to changing the regulator’s forecasts. It would also prevent the rest of the adviser community paying for the actions of those who choose to go off the list.
We have the new capital adequacy regime. Add in a permitted investment list and a culture of due diligence and perhaps we can look forward to a brighter regulatory future.
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