The Financial Services Authority has issued a warning to advisers over the suitability of advice given to clients to transfer into self-invested personal pensions.
Just over a week before the FSA takes over the regulation of personal pensions, including sipps, the regulator is reminding advisers that from 6 April 2007 they must only use authorised sipp operators.
It also points out they should ensure “that advice given to transfers into Sipps is suitable, reflects the customer's needs, priorities and circumstances, and is not influenced by commission payments”.
In its March newsletter for financial advisers, the FSA says it is already monitoring advice on sipps and warns “if we see cause for concern in this area, we will consider carrying out focused thematic work”.
The four-page newsletter warns advisers their “own regulatory status is equally important” as that of providers but confirms “if you advise on Sipps or any other personal pension scheme, or intend to do so, and already have permission to advise on stakeholder pensions, your firm will automatically receive the similar new permission for personal pensions including sipps”.
However it points out if advisers “don’t have the stakeholder pension permission but want to advise on personal pensions including sipps, then you need to apply for a variation of your permission”.
In addition, the FSA says following a review of sipps financial promotions issued by advisory firms in the lead up to regulation it has concerns with a “significant number” of them, and warns firms will “need to take steps to ensure their financial promotions comply with our requirements”.
The newsletter points out some of the FSA’s disclosure templates have altered as a result of the new regulation regime, and as a result states “any firm advising on any pension needs to add new wording to their menu about commission on these products”.
And the FSA also highlighted concerns about the amount of transfer business which has ended up in sipps since A-day, as it says while the new pensions tax regime is “likely to have stimulated some of this growth”, “we are also aware that a significant amount of business has resulted from switches from other pension arrangements”.
It points out there have been suggestions some consumers have been advised to join sipps when they do not need the flexibility and range of features on offer and as a result would be better suited to a stakeholder or personal pension with “sufficient features but which comes at a cheaper cost”.
As a result it says: “We are already monitoring closely the provision of advice on sipps and are having discussions with a limited number of firms to further inform ourselves of market practices.”
“We require firms to treat their customers fairly. Advice to switch into sipps should be suitable - reflecting the customer’s needs, priorities and circumstances – and not influenced by commission payments. If appropriate, it should also comply with our ‘pension transfer’ rules. If we see cause for concern in this area or indeed other aspects of sipp advice, we will consider focused thematic work.”
However, Tim Fox, head of compliance at Merchant Investors, says in its ‘Financial Risk Outlook for 2007’ the FSA questions the role of providers in ensuring pension transfers are suitable and in an investor’s best interests, not the advisers.
Although he says the recent decision to retain the RU64 rule – which requires advisers to explain why a product is more suitable than stakeholder – means it is “ultimately advisers who will pay the price for any transfer ‘mistakes’”.
Fox says: “This u-turn puts pension advisers in a real catch-22. There’s already been much debate around the appropriateness of the high levels of pension transfer business going through, and whether or not this is being led by advisers or providers themselves, and now advisers are going to be left high and dry.”
He points out the FSA said in January that while many of these transfers are no doubt in the best interests of consumers who require more flexible pension arrangements, the “suitability of the product and the motivation for many of the transfers remains unclear”.
As a result, he says: “With the reversal of plans to scrap RU64 advisers are placed in the precarious position of following providers’ guidance on Sipp transfer activity while ultimately being the only party accountable to the FSA should anything with the client’s transfer be deemed improper – they alone will be expected to bear the cost of providing financial redress to clients as a consequence of any misinformation from providers.
“With the imminent regulation of all sipps, it’s more important than ever for firms offering a whole of market advisory service to understand the different types of sipp available, and the options that only certain types of sipp can provide.”
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Nyree Stewart on 020 7034 2681 or email [email protected]IFAonline
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