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Thin line for SIPP providers when assessing investments

When assessing which investments to accept, a SIPP provider needs a clear and structured process from which it must not deviate, warns Martin Tilley, director of Technical Services, Dentons Pension Management

At a recent industry seminar, John Moret quoted estimated numbers of SIPPs currently in existence of 1.5 million and tried to break this number down further between platform based SIPPs and those more commonly known as full or bespoke SIPPs. This has become far more difficult as there are now hybrids that blur the definitions and subsequent speakers went on to question “how full can a full SIPP be?”

The last and most damning thematic review by the FCA, the regulator of the SIPP market, concluded that “most SIPP operators failed to undertake adequate due diligence on high-risk, speculative and non-standard investments”. Also, that SIPP providers must “have adequate procedures in place to assess these investments.”

The onus of the quality of the SIPP book is now firmly placed on the SIPP operator and I would imagine that each and every one, therefore, has reviewed their business model and implemented action accordingly. For some, this action has been to exit the market, either by way of business sale or by retraction to a far more basic proposition.

Others will no longer accept certain types of asset class, which they previously had, or will limit the scope of their acceptances, perhaps in the matters of commercial property and unquoted shares to UK domiciled arrangements where the ability to obtain the data necessary to undertake the levels of due diligence now required is easier. Central to their processes and procedures must be whether holding the proposed investment within their book is in the best interests, not only of their clients, but also for themselves.

Subjectivity in decision-making

One of the problems each SIPP operator will face is the degree to which a subjective view is required on given investments. For acceptance decisions to be made there must be a clear process and “lines in the sand.” Some investments will clearly be either one side of the line or the other and can be accepted or declined accordingly but there will also be a number which, through interpretation of facts could fall either side. It is here that the SIPP operator must rely upon the expertise and experience of its staff to make a judgement call.

Sadly, these investments are the ones that require the most due diligence as the decision to either accept or decline must be recorded and evidenced in detail so that, should for any reason that decision need to be examined in the future, the exact process on which that decision was made will be clear. Also by their very nature it is these types of proposed investments that will use up the most time and resource.

Each SIPP operator will impose their own criteria to avoid as far as is possible too many subjective decisions. When assessing for example whether a loan to an unconnected party might be legitimate or potentially a scam or liberation exercise the SIPP operator might impose a minimum period for which the company has been trading of two or three years. A similar period might be imposed for unquoted equity where similar concerns might apply. Meeting these criteria of course does not imply acceptance but simply one stage of the process having been met.

No deviation

The unfortunate consequence of this approach is that wherever the line is drawn, potentially there will be perfectly good prospective investments falling just the wrong side and these will be declined. This is the necessity of maintaining a clear and structured process and not deviating from it based on subjective decisions, which again may open the client and the SIPP operator to risk. We believe this is what the regulator requires for the operator to meet the COBS and TCF rules.

Aligned to this must be the consideration of cost. Some investments will require significant investment of time and resources. What must also be considered is the likely prospect of the investment being accepted and thus the case being able to proceed and the operator being able to recoup its initial up-front expense.

For the majority of cases, this due diligence on investment will take place before the SIPP has even been created as it is a matter of good practice not to accept a client until it can be established that the proposed investment can be accommodated.

SIPP operators have therefore developed data collection sheets for non standard or more esoteric investments to help advisers collect themselves the information that will be necessary for a timely decision to be made.

Unfortunately, these can be long and detailed and themselves put an onus on the adviser to collect the data directly from the investment provider or from their client. A recent enquiry from an adviser in connection with a potential investment into intellectual property was terminated with the quote “Well if you are going to make it that difficult, you simply don’t want the business do you?”

It seems that unfortunately, a SIPP operator might be damned if they do accept certain investments by the regulator or ombudsman or damned by the intermediary or client if they don’t.

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