The FCA is close to finalising its third thematic review and Sipp suitability seems certain to come under the microscope when it is published later in the summer.
Several self-invested personal pension providers have already been told by the regulator to suspend support for non-mainstream investments. Industry commentators are predicting enforcement action against a number of providers.
The regulator has instructed some Sipp providers not to deal with certain non-mainstream investments and has issued a further warning to advisers who encourage clients to invest their pension in unregulated products through Sipps.
The message would appear to be that if you advise a client to invest in something esoteric, you must assess its suitability comprehensively. If you do not, and something goes awry with the underlying investment, it looks likely the FCA will point the finger at you.
If you are operating in the Sipps market, you need to understand the reasons for investing in a Sipp and make sure it is appropriate for the customer.
Typically, commercial property is acceptable. But even then, many advisers will not have the specific expertise to comment on the suitability of such property as an underlying investment.
Getting a decent exit strategy in place is also essential to ensure it fits with the customer’s retirement plans. To retire satisfactorily, the investor may need to sell the property, which does not happen overnight, and renting carries the risk of void periods and uncertainty regarding continuity of occupation.
Offshore property schemes are not recommended, especially in light of the Harlequin debacle. Only a few weeks ago, Andrew Rees and Timothy Hughes, partners at the now defunct 1 Stop Financial Services, were banned by the FCA after advising nearly 2,000 customers on switching their pensions – valued at in excess of £112m – into Sipps. Half of that amount went to Harlequin.
By being advised to invest in unregulated and often high-risk products without the suitability of these being assessed, customers were exposed to the risk of losing their hard-earned pension funds.
The FCA takes a dim view of advisers who recommend that clients invest in unregulated collective investment schemes, after noticing that some advisers were recommending transfers or switches without thoroughly determining their advantages and disadvantages.
In simple terms, an adviser cannot act as a conduit to simply provide whatever a client might believe is suitable.
Simon Thomas is head of policy at Tenet Group
