Pension transfers or switches with a view to investing pension monies into unregulated products through SIPPs - Further alert

We are alerting firms to our requirements when they give advice on self-invested personal pensions (SIPPS), giving our view and key messages. We also set out the failings we have encountered, which firms in this market should carefully consider.

Why are we issuing this alert?

On 18 January 2013, we outlined our concerns that firms were advising on pension transfers or switches to SIPPs without assessing the advantages and disadvantages for customers of the underlying investments to be held within the new pension arrangement.

Following the initial alert, we carried out further supervisory work, including visiting some firms, to assess whether their business model complied with our requirements. Through this work, we continued to identify serious and ongoing failings.

We have taken action to stop a large number of firms from operating such business models and will continue to do so. We have also recently published two final notices where we took enforcement action against two partners in a firm, Andrew Rees and Timothy Hughes, who failed to comply with our rules in this area.  

Our view

Customers have a right to expect an authorised firm to act in their best interests, yet the serious and ongoing failings found at firms have placed a substantial number of customers’ retirement savings at risk.

We believe pension transfers or switches to SIPPs intended to hold non-mainstream propositions are unlikely to be suitable options for the vast majority of retail customers. Firms operating in this market need to be particularly careful to ensure their advice is suitable.

What does this mean for firms?

Where a financial adviser recommends a SIPP knowing that the customer will transfer or switch from a current pension arrangement to release funds to invest through a SIPP, then the suitability of the underlying investment must form part of the advice given to the customer. If the underlying investment is not suitable for the customer, then the overall advice is not suitable.

If a firm does not fully understand the underlying investment proposition intended to be held within a SIPP, then it should not offer advice on the pension transfer or switch at all as it will not be able to assess suitability of the transaction as a whole.

The failings outlined in this alert are unacceptable and amount to conduct that falls well short of firms’ obligations under our Principles for Businesses and Conduct of Business rules. In particular, we are reminding firms that they must conduct their business with integrity (Principle 1), due skill, care and diligence (Principle 2) and must pay due regard to the interests of their customers and treat them fairly (Principle 6). 

What failings did we see?

The initial alert outlined our view that where advice is given on a product (such as a SIPP) which is intended as a wrapper or vehicle for investment in other products, provision of suitable advice generally requires consideration of the overall transaction, that is, the vehicle or wrapper and the expected underlying investments (whether or not such investments are regulated products).  

Despite the initial alert, some firms continue to operate a model where they purportedly restrict their advice to the merits of the SIPP wrapper. We think advising on the suitability of a pension transfer or switch cannot be reasonably done without considering both the customer’s existing pension arrangement and the underlying investments intended to be held within the SIPP.

In the cases we have seen, customers’ existing arrangements were invariably traditional pension plans invested in mainstream funds or final salary schemes, with the customer generally having no experience of non-mainstream propositions and many having very limited experience of standard investments. The new arrangements firms proposed were to transfer or switch the customers’ pension funds to a SIPP, with a view to investment in non-mainstream propositions, which were typically unregulated, high risk and highly illiquid investments. Some examples of these investments are overseas property developments, store pods and forestry. Such transfers or switches are unlikely to be suitable for the vast majority of retail customers.

Generally speaking, we found very poor standards of advice. Firms typically failed to carry out an adequate assessment of the customer’s overall financial position, needs, attitude to risk and objectives in relation to the switch or transfer as a whole (including the characteristics and risk of the wrapper and of the underlying investments). Advisers’ understanding of non-mainstream propositions was also typically very poor, at least in part because of inadequate due diligence on the products and on the product provider. 

Professional indemnity insurance (PII)

We found that many firms had inadequate PII cover in place or had failed to disclose to their insurers the true nature of their business model. Firms should be open and honest with their insurers and take reasonable care to organise and control their affairs responsibly and effectively, with adequate risk management systems appropriate to their business (Principle 3).  

Other conduct failings

Some firms operated business models whereby all customers were treated as ‘insistent’ or seeking execution-only services. These models were clearly adopted in an attempt to avoid compliance with suitability requirements, while exposing customers to a high risk of detriment.

We have also seen a number of firms adapting their business model to advise customers to take out Small Self-Administered Schemes in an attempt to avoid FCA scrutiny. However, advice to switch or transfer from pension arrangements is a regulated activity regardless of the funds’ destination.

What happens next?

Our work in this area is ongoing and, if you continue to operate in this area, you must have a robust and compliant advisory process in place to ensure you meet our requirements, acting at all times honestly, professionally and in accordance with the best interests of the customer. We anticipate further firms, and their senior management, being referred to our Enforcement division.