SIPPs – Where should the blame lie?

The latest statistics from the FOS show that SIPP complaints have sky rocketed.  Berkeley Burke and Carey Pensions throw up some interesting moral questions.

Should an established SIPP provider providing a low-cost administrative function be expected to undertake proper due diligence?  Does an investor deserve to be protected from his own greed, stupidity, naivety or recklessness?   Is the SIPP provider being sued because he’s the last man standing, with insurance?

Or, does the consumer-investor, given a hard sell by an unscrupulous salesman, deserve some protection from an established SIPP provider?  If so, how far should that protection go?  

The consumer

SIPPs, self-invested personal pensions, are do-it-yourself pensions, intended for financially sophisticated and generally high net worth individuals, who wish to make their own investment decisions. The SIPP is merely a wrapper and the investor can choose what goes inside.  

As the various High Court, Pensions Ombudsman Service and Financial Ombudsman Service cases which have hit the headlines demonstrate, SIPPs have also fairly routinely been sold to unsophisticated investors as a means to invest in esoteric investments, such as in foreign holiday homes, storage pods, Australian farmland, bamboo or eco fuels.  Many of these investments have proved to be scams. 

It is tempting to say that it should have been obvious that the promised returns, and often financial incentives to invest, were too good to be true.  However, it is hard not to have at least some sympathy for those affected who may have been tricked by plausible fraudsters, and who may no longer be able to afford their planned retirement. 

The SIPP providers

It may be perceived that the SIPP industry is more responsible for, and better placed to bear the loss caused by, a poor investment decision.  They are the professionals who arguably stood more chance of spotting a fraud. 

In many cases there will be insurance cover for claims that arise.  It may therefore seem that blaming the SIPP provider gives an easy solution where the only victim is a deep-pocketed insurer. 

However, is that really the case?  And is that the fair outcome?   The FOS would say so, but the Pension Ombudsman (in the case of Mr Goodwin) has decided not, on the same facts. 

Insurance position

A SIPP provider’s insurer likely will not be the only victim.  Increasingly insurance policies do not cover claims arising from esoteric investments and/or Unregulated Collective Investment Schemes, and/or they limit the amount of cover available for FOS claims.  SIPP providers facing claims from duped investors therefore face a real risk of insolvency: defence costs alone could force a firm out of business. 

It was this risk that led the Financial Conduct Authority to publish its “Dear CEO” letter in October 2018 reminding relevant regulated entities about their obligation to ensure that they can meet their financial commitments going forward. 

Even if claims are covered by insurance, there will be a personal toll on the SIPP provider who will face reputational damage, likely excess payment(s) and an increase in insurance premiums upon renewal, if further professional indemnity cover can be found at all. 

The back story

In our experience the facts behind the recent high profile case involving Berkeley Burke (considered in our last edition) illustrate the typical scenario. 

Berkeley Burke sold a SIPP acting on an execution only basis, so was under no obligation to advise on the suitability of the proposed investment in “green oil” and indeed was not authorised to do so.  The documents signed by the investor made Berkeley Burke’s role clear and also that the proposed investment was high risk.  They recommended that independent financial advice be sought. 

The investor was undeterred and proceeded with the investment without seeking advice.  When the investment subsequently failed, the investor, possibly encouraged by claims management firms and claimant solicitors touting for business, looked for someone to blame. 

The introducer who sold the investment was unregulated and, even if still in existence, likely uninsured.  Focus therefore turned to the SIPP provider effectively as “the last man standing”. 

As already stated, the SIPP provider made its limited role clear and recommended that advice was sought.  It was also likely paid only a nominal sum, as its job was essentially administrative - setting up the SIPP to hold the chosen investment. 

In these circumstances and given the potential ramifications, is it fair to hold the SIPP provider responsible, in particular for acts or omissions from years ago?  Shouldn’t the investor take responsibility?  SIPPs are for consenting grown-ups.  SIPP providers are precluded from giving advice.

Regardless of personal views on the answer to that question, the FOS and the FCA have made it clear that SIPP providers cannot close their eyes to the underlying SIPP investment, and the court has upheld their decision.  Good practice requires due diligence be conducted. 

The future

The decision in Berkeley Burke has to some extent clarified a SIPP provider’s responsibility when acting in execution only transactions.  However, Berkeley Burke have obtained permission to appeal the High Court’s decision.  The judgment in Adams v Carey Pensions, which arises from a similar set of facts, is also awaited. 

It will be important for the industry for the court to clarify how far any duty goes.  Does the SIPP provider effectively underwrite the failed investment?  If the court finds against the SIPP provider, a deluge of similar claims against SIPP providers can be expected.