Threats from the regulator and links to soaring compensation claims betray some wild horse-trading in the self-invested personal pension (SIPP) market. Laura Miller takes stock of retirement's racy outrider...
Overseas property on an island without an airport; a bio-ethanol plant in Grimsby; non-existent or non-negotiable strips of land in Argentina and Australia; SIPP investors have lost money in them all.
Now the consequences of flying fast and loose with high-risk esoteric investments are being felt.
Complaints will cost the industry 13% more in compensation for the coming year than last, a £383m bill driven by bad SIPP investment advice. A little over 20% of this will be shouldered by life and pensions advisers alone.
The Financial Services Compensation Scheme (FSCS) has put pressure on the regulator to up the £50,000 SIPP protection limit to deal with the scale of the problem.
Bad advice is a driver - (though the FSCS has borne the brunt of the beating about it, as if somehow it is self-generating the claims that help send advisers' levies up 400% in a year).
But SIPP providers' role in accepting risky investments and their symbiotic mutualistic relationship with advisers - how they work together - is about to be exploded.
The Financial Conduct Authority (FCA) has said it is poised to shut down SIPP providers who bomb the regulator's capital tests, which, three years in the making, come into force on 1 September.
The new capital requirements demand SIPP operators with ‘non-mainstream assets' on their books, like the high-risk unregulated investments that have caused so many FSCS claims, hold much greater cash reserves.
SIPP providers eschew blame for the avalanche of SIPP complaints at the FSCS. They do not give advice and so are not causing the claims, they say.
"The relationship between SIPP operator and investor has always sat awkwardly on a combination of trust law and contract law," Mike Morrison, head of platform technical at AJ Bell, said.
"Perhaps you could argue that SIPP operators ought to walk away from investments that they feel should not be held.
"Without question SIPP providers should monitor and bear some responsibility for the quality of business introduced to them, by who, why and at what frequency, but I do not believe they should have to see copies of suitability reports or get involved with individual suitability."
The widely held stance creates an oddity; SIPP providers take fees but little accountability for investments that passed their due diligence and then spectacularly failed, costing pension investors hundreds of millions of pounds.
Elysian Fuels is one among many examples. The high-risk investment scheme took up to £200m largely from pension investors but in October had the value of its shares cut to nil.
SIPP provider James Hay confirmed to Professional Adviser that its clients have invested a total of £55m in Elysian Fuels. Rowanmoor also confirmed it has some exposure, though would not confirm how much.
Rowanmoor head of pensions technical Robert Graves said it accepted Elysian Fuels via its SIPP for a short period until 2012, "before we became uncomfortable with how it was working".
"Sometimes it is not until you get six months to a year down the line when you realise it's not doing what it says on the tin," he said.
Vigilance varies among providers. An informal network exists among several who consider themselves "quality providers", through which they share warnings about worrying investments.
But the warnings are not made public due to fear of libel suits, concerns are rarely raised with the regulator or HMRC after what providers claim is experience of whistleblowing being a waste of time, and the blame is shifted to advisers.
John Moret of consultancy More2SIPP, known in the industry as ‘Mr SIPP', thinks responsibility should be shared, though not necessarily equally.
"SIPP investments where they've failed, I think there's a case against SIPPs there, as well as advisers and introducers," he said.
"But it comes down to the advice regime. Acts that were incompetent or negligent should have been flagged."
The FCA last year started seeking information from SIPP providers to pinpoint which advisers are placing clients in non-standard investments.
To providers, the FCA red flagged their due diligence responsibilities on non-standard assets in July 2014. But the requirement that they put "adequate procedures in place" to access that type of investment business remains vague.
In subsequent cases of wrongdoing involving SIPPs the FCA has limited its enforcement action to advisers.
Three-year black hole
Moret argues weak regulation and lack of oversight in the three-year gap between two significant thematic reviews into practices in the SIPP market helped cause the current emergency.
"The FSA is hugely culpable for a lot of what happened with unregulated investments in SIPPs, which have gone [bust], meaning someone is accountable. The common factor is a slowness to react."
He gives the example of 1 Stop, an advice firm that went bust under the weight of compensation claims and whose directors were banned and fined by the FCA for bad SIPP advice, including investing £50m in distressed overseas property firm Harlequin.
"It was a small business with just a couple of advisers that did 2,000 SIPPs in a couple of months! I question how the regulator did not identify earlier that there were problems and warn off other [SIPP] providers," Moret said.
"There was a thematic review in 2009 of SIPP operators. By and large, they were given a clean bill of health. The next one was in 2012 [where problems were found].
"It is in that three year period where most of these companies - Harlequin, Tailormade and 1 Stop - had something going on. And three or four years later we are picking up the pieces.
"Most of the SIPPs done by 1 Stop were small, around £60,000 each. SIPPs are not generally meant for people with lower assets. If I was the FCA that would be an indicator for me to look into it."
But regulation is only a by-product of established imperfections.
"Without doubt, the actions of some SIPP providers' whose due diligence of assets and introducers was poor has damaged the SIPP operator profession and hiding behind regulation which was not at the time up to speed is a weak argument," Martin Tilley, technical director at SIPP provider Dentons said.
High-profile and sector-crippling claims at the FSCS and the potentially devastating impact of looming capital adequacy rules are forcing the crisis to a head.
SIPP providers - as well as advisers - need to act like they are on the frontline, not hiding in a bunker.
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