8 years of SIPP reviews
Self invested personal pensions, or SIPPs have been around for 25 years and were once deemed the ‘must have’ product for the sophisticated and high net worth investor. Yet, the SIPP industry has seen substantial and continued growth over recent years, with increasing exposure across all categories of investor. Naturally, this has caught the attention of the Financial Conduct Authority (FCA), increasing regulation and, in turn, uncertainty in the market.
Following the government’s desire for all pension products to fall under the same regulatory regime, the activity of administering SIPPs (under the permission of establishing, operation and/or winding up a personal pension scheme) became regulated in 2007. Since then, SIPPs have increasingly featured on the regulator’s radar and the FCA announced in October of last year that they are conducting their third thematic review into the SIPP marketplace.
When the first review was conducted in 2007, and subsequently published in 2009, the then regulator, the Financial Services Authority (FSA) reported that on the whole SIPP operators did not pose a significant risk to their statutory objectives. However, this view was soon to change, with the regulator becoming increasingly concerned with the emerging picture, as they delved further into the practices of the marketplace.
In October 2012, the FSA published its report of the second SIPP thematic review and its findings confirmed the regulator’s concerns around poor firm conduct and the potential for significant consumer detriment. Since then, the FCA has stated that the industry had not moved quickly enough to improve their practices and there remain serious concerns that the sector has the potential to cause considerable consumer detriment. Particular issues identified include that:
• Firms may have been a conduit for financial crime;
• Firms lacked responsibilities within senior management; and
• There was an increase in non- standard investments, which were poorly managed.
The findings of the second review, published in October 2012, identified poor firm compliance with regulatory requirements, particularly in the areas of risk planning and mitigation. In addition to generally poor systems and controls, the majority of SIPP operators visited by the regulator were unable to articulate the application of CASS (client money and asset rules) to their business structure. This led, in some cases, to a failure to protect clients’ assets adequately, putting clients at risk of loss if a non-compliant SIPP operator were to fail. The regulator also found inadequate controls over the investments held within some SIPPs.
It is clear from these findings that SIPP operators have the potential to lead to significant consumer detriment through a failure to adequately control their businesses. As a result, the FCA has planned a programme of coordinated work, with the aim of raising standards across the sector.
What does this mean for advisers?
Since publishing their findings in 2012, the FCA is disappointed with the lack of progress and their frustrations are growing from having to review this sector yet again. Bad practice has not been fully addressed and some firms are still not looking after the interests of their clients.
The increased regulation in this market will no doubt leave advisers unsettled about which SIPP providers to use and indeed whether to recommend them at all. The impact of this increased scrutiny and regulation on the SIPP market is uncertain. Are providers offering SIPP products that will be suitable for your clients? Are their business models robust enough? Will this all lead to a decrease in the number of providers offering SIPPs? Only time will tell, but in the meantime advisers should ensure that they increase their due diligence on the providers with whom they place their business.
With the FCA questioning SIPP operators’ financial integrity and oversight, it is imperative that advisers are sure that their chosen providers are putting customers at the heart of their businesses.