Slapdash SIPPs told to sharpen up by FCA

SIPP Operators have repeatedly been in the headlines since the FCA completed its second thematic review in 2012.

At that time, SIPPS had blossomed from a fairly bespoke offering to select investors into a more mainstream product selected by – or, rather, recommended to - an increasing number of retail consumers, and there were general concerns that the existing guidance might not have been properly implemented and that consumers' interests were not being sufficiently protected.   The FCA concluded that the SIPP Operators had a fair bit to do to improve as amongst other findings the FCA said there were generally poor systems and controls, poor compliance with regulatory requirements, some risk to client assets and poor management of "non standard assets". The FCA has also raised concerns over capital adequacy and the nature of investments (we will look at these issues in a series of blogs to follow).

After the 2102 review, the FCA's guidance to SIPP Operators was updated in October 2013 and subsequently the FCA embarked on its third thematic review to determine whether that guidance is being followed. This last review focussed on three core areas: a) the Operators' financial resources; b) the quality of investment business within the SIPPs; and, c) operational procedures and controls. The FCA has said that the failings discovered put UK consumers' pensions savings at considerable risk, particularly from scams and frauds. The FCA therefore wrote, over the summer, a "Dear CEO letter" to all SIPP Operators outlining its on-going concerns. The letter concentrated on two important areas and stated that the FCA expected CEOs to address the findings:-

1. Due diligence procedures:

   The FCA found that a significant number of Operators:

   • do not have the expertise or resources to assess non-standard investments but are still allowing these transactions to proceed. The FCA highlighted that this could allow a pension scheme to become a vehicle for high risk and speculative investments which are not secure.
   • fail to understand the nature of the investment, especially contracts for rights to future income and sale/re-purchase agreements
   • fail to check that money is being paid to legitimate businesses
   • fail to verify that assets are real and secure
   • fail to verify that investment schemes are being operated as claimed
   • are having difficulty with completing due diligence for non-standard overseas investment schemes where firms do not have access to local qualified legal professionals or accountants
   • are struggling to establish where money is being sent and whether investments are genuine, with an increasing number of opaque investment structures (i.e. special purpose vehicles)
   • are incorrectly relying on marketing and promotional material produced by investment providers as part of the due diligence process
   • are failing to consider how investments could be valued or realised at the application stage
2. Applying the correct Prudential Rules:

   The FCA also found that some Operators:

   • are operating in breach of the current minimum capital requirements
   • unable to identify correct prudential rules that apply to their business
   • fail to understand the liquid capital requirement and impact of illiquid assets
   • A lot of these SIPP operators are failing to correctly calculate the firm's capital requirement.

As well as the Dear CEO letter the FCA has requested that several firms limit their business and have initiated enforcement investigations against some. There are also to be more reviews in the future, alongside the FCA's regular supervisory work for smaller (C4) SIPP Operators.

This on-going focus on SIPPs reinforces that all SIPP Operators need to review their business model and procedures and address any weakness that are discovered. With the ever present threat of enforcement action, failure to do so puts the Operators, as well as consumers, at risk. The FCA's approach makes it clear that complacency is not an option. In addition, this latest flurry of activity from the FCA is not isolated. With the increases in capital adequacy that the Operators have to meet, FOS turning its attention to SIPP Operators, the awaited decision by the Pension Ombudsman on the delayed transfer cases (or 'liberation' cases as they are often called) and the impact on the budgetary reforms, the pressure is unlikely to reduce on SIPP Operators for some time to come.

We intend to follow these developments closely and comment on how SIPP firms are likely to respond through a series of linked blog posts.