The past year has been a turbulent one for the SIPP market with much confusion as to the responsibilities being placed on advisers and providers. According to Billy Mackay the time has come to bring clarification to the market
It seems that SIPPs are destined to remain in the spotlight for the foreseeable future. The FSA’s thematic work and review of small SIPP providers has provided the speculators and the fans of gossip with new material. Looking up ‘gossip’ on the thesaurus on my PC, I see that alternative words include rumour, hearsay and tittle-tattle. Some of the recent speculation and commentary has been just that.
Understanding the events of the last year should allow us to put the tittle-tattle aside and focus on the facts.
On 29th September 2008 the FSA published a press release making it clear that they expect firms to ensure that suitable advice is provided on any transfer to a SIPP.
The release outlined clearly that the FSA expects firms to ensure any advice to transfer is suitable and based on an assessment of the customer needs to help consumers make decisions that are right for them. This is consistent with other areas of the pension market, makes a great deal of sense and should be supported.
It then goes on to say that this would include determining whether there is a genuine need for the investment flexibility and control associated with a SIPP. You must provide a clear explanation of the costs involved and how the recommendation meets a customer’s needs and attitude to risk.
The FSA report on the quality of advice on pension switching was issued on Friday 5th December 2008. It summarised the findings of the thematic work looking at advised transfers to personal pensions including SIPPs.
Part one of the review assessed the quality of advice given to customers since A-Day to switch their existing pensions into a personal pension plan (PPP) or self-invested personal pension (SIPP) and the firms’ systems and controls relating to this advice.
Part two assessed whether the actions of pension providers affected the quality of this advice.
The FSA visited 30 adviser firms, assessing 500 files and found that the advice was unsuitable in 16% of cases. A number of reasons were provided as examples.
The switch involved extra product costs without good reason (79% of unsuitable cases).
Reasons for switching included:
- investment flexibility, but this was not likely to be used;
- flexibility of an income drawdown option, with no evidence that this was needed;
- The fund(s) recommended were not suitable for the customer’s attitude to risk and personal circumstances (40% of unsuitable cases);
- The adviser failed to explain the need for, or put in place, ongoing reviews when necessary (26% of unsuitable cases); and
- The switch involved loss of benefits from the ceding scheme without good reason (14% of unsuitable cases).
The FSA did not have serious concerns about the way the pension providers visited had been marketing their products to advisers. However, they were concerned that some seemed unlikely to be complying with the requirement to use lower projection rates where the standard rates would overstate the investment potential. The example provided covered cases where 5%, 7% and 9% projections were included on cash deposits.
Initial press coverage suggested that the issues and problems identified in this thematic review related to the SIPP market. The report simply did not provide sufficient information to identify whether the cases involved were transfers to SIPP or personal pensions. Indeed, correspondence we entered into with the FSA confirmed that the thematic review was structured to assess the common risk of unsuitable advice for customers switching into both product types. The sample selected was broadly representative of the market for advised switches into personal pensions and SIPPs. It is important to draw a line under any confusion on this point, the FSA has made it clear that the methodology adopted did not attempt to make a comparative assessment between SIPPs and PPPs.
On 4th September 2009, the FSA published a report and accompanying documents about its review of small SIPP operators. The FSA’s review covered approximately 60 firms contacted during December 2008 with a questionnaire covering a range of SIPP operator activities. The FSA made follow up telephone assessment calls with 50% of the initial sample and some firms were also visited.
The main findings of the FSA’s work are summarised below:
- They did not believe that, taken as a whole, small SIPP operators posed a significant threat to the FSA statutory objectives. They were pleased to discover some very well run firms, and many examples of good practice. Nevertheless, the project uncovered a number of concerns on how firms conduct their business.
- Some firms were failing to appreciate the scope and nature of their TCF responsibilities and failing to demonstrate fair treatment through use of appropriate management information (MI) and evidence;
- Misunderstandings were found among some SIPP operators regarding their responsibilities for the quality of business they administer, where advice is the responsibility of a third party;
- Systems and controls issues were identified, including in relation to training and competence regimes, accuracy and transparency of illustrations, disclosure of charges and firms’ communication of the open market option.
On 8th October 2009, the FSA attended and presented at the AMPS AGM. The FSA presentation looked at the outcome of the review of small SIPP providers and expanded on the points listed above. Judging from questions raised from the floor, the most controversial area seemed to be an understanding of the split of responsibilities where an adviser introduces business to a firm.
Press coverage in the weeks after the session suggested that there was uncertainty with some suggesting that SIPP providers could be responsible for advice. Prior to the event I had questioned the logic of SIPP providers having to collect suitability reports. However, having attended the session I would have to say that the FSA could not have been clearer on this point had they scribbled it in big letters on Big Ben. The FSA made it clear that advisers were responsible for advice and it was the responsibility of the provider to decide what represented appropriate MI and that the suitability report point was merely provided as an example of the practice adopted by one provider. On one of the slides used it was outlined that:
“SIPP operators are not responsible for advice, but they:
- Should be aware of their responsibilities.
- Should manage relationships with 3rd parties.
- Gather and analyse MI on the firms that supply clients and give advice.”
The requirement to understand the nature of clients a business attracts is a basic requirement of treating customers fairly and not specific to the review of small SIPP providers. You have to accept that product providers have a responsibility to assess the business received on a number of levels. Ultimately, it is the product providers who manufacture the products and design the marketing material used to distribute them. They must be comfortable that they have the systems and processes in place to collect the necessary MI and evidence to be satisfied that the clients attracted are consistent with the products and marketing material used. To be clear, advisers are responsible for the advice and the product provider must take responsibility for the nature of the product and the way it is marketed.
Product providers can do this in a number of ways. They may decide to carry out client surveys and target market studies to ensure that they have a comprehensive understanding of the client base. They may decide to set clear adviser remuneration policies and limits with any unusual activity carefully considered and reviewed. They may run regular queries across the book of clients to check to see if new clients are consistent with the nature of the products. At the end of the day all providers must decide what is required in terms of MI and evidence.
Where does this leave SIPPs?
If you put the tittle-tattle aside you will see that SIPPs continue to be a perfectly viable product for many clients. Increased competition and use of technology has driven costs down so that many SIPP products compete head on with traditional personal pension and platform pension products. This will continue to be the case and consolidation of assets will continue to be a key theme.
In a world full of dated pension products and old fashioned fund ranges that will never evolve, the popularity of SIPPs will continue. There has never been a clearer need to review the accumulated pension funds of existing clients. The number of issues raised in this article shows that care is always needed. However, a statement included in the original Securities and Investment Board Review of Past Pension Transfers in 1994 said “Pension transfer business is a legitimate form of business, for the simple reason that there are many situations in which the balance of advantage to the individual points to a transfer, or in which the individual has an informed preference for a transfer”. Meeting the challenge of providing the client with sufficient information to form an informed preference is what it is all about.
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