Fiona Murphy asks what the impact of the FSA's paper restricting UCIS promotion will mean for the SIPP market
The FSA's consultation on UCIS has been a long time in coming. High profile failures and screaming headlines about these investments have fuelled debate in the SIPP market. Should they be permitted? Who are they suitable for? And who should have responsibility for screening whether these investments stack up?
Added to that, SIPP providers questioned whether higher capital adequacy rules and levies would come in to hedge against investment failures, placing more pressure on their business models.
The FSA's recent proposals have provided some clarity on these questions. The paper has proposed that UCIS should only be promoted to high net worth and sophisticated investors - not retail customers.
This should go some way to alleviate the problem. After all, a lot of the examples have been mis-selling cases. However, advisers and clients have to know, that despite negative publicity, not all UCIS will go wrong. A high net worth client, may invest in UCIS as a speculative investment as part of their portfolio.
But in isolated incidences, retail customers have sustained heavy losses, as they have put their entire pension into a UCIS and lost it all. It wasn't that the investment was bad; it didn't suit the risk profile of the customer. In the worst cases, however, UCIS have been exposed as scams and therefore, all investments should be thoroughly checked.
In July, the Association of Member-Directed Pension Schemes (AMPS), a body that represents the interests of the self-invested pension market, released a statement on their stance. They said The Serious Fraud Office and Financial Services Authority should concentrate on stopping the promotion of unregulated investments to the general public, rather than increasing red tape for SIPP providers.
They felt the SIPP industry was under pressure enough and that SIPP providers should be allowed to decide how to run their business. With such questions, have the proposals presented good news for the industry?
Martin Tilley, director of technical services at Dentons Pensions says the reform will be good for the reputation of the SIPP industry.
He says: "It will certainly have an impact and I'd like to think, not a negative one. From a SIPP industry perspective, it doesn't want to be associated with a means whereby UCIS are promoted or sold to inappropriate parties. In terms of what the FSA has done, yes it has cut out one level of distribution - in that IFAs should only be recommending to appropriate people, which I think is good."
Broadly, SIPP providers have welcomed the long-awaited clarification on this investment class. Elaine Turtle, treasurer of AMPS says: "AMPS has been working with the authorities because we thought the promotion was risky for retail clients so we're pleased the clarification has come.
"We're also pleased SIPP providers can accept execution only cases from high net worth individuals. In what we've seen so far, it's not been banned, which is a good, but it has been made very clear who they are suitable for, which is the clarification that has been needed."
While these are both positive changes for the industry, arguably it could have consequences for SIPP providers reliant on UCIS promotion to drive new business. In particular, smaller SIPP providers could be at risk.
Suffolk Life's head of marketing Greg Kingston has said this slowing of business could be the catalyst needed to spark SIPP firm consolidation.
But these fears could be premature according to Turtle: "There's been some speculation about consolidation but I'm not sure it will happen," she says. "There's been speculation about consolidation in the SIPP market since 2007 and it hasn't happened. If an asset provider has a whole book of UCIS, [would] someone want to buy that?"
Turtle adds pending capital adequacy requirements might cause more consolidation for smaller SIPP providers that are not equipped to deal with tougher requirements.
But change might not be such a bad thing. Tilley says: "It may have a detrimental effect on the number of SIPPs being written but it will have a positive effect on the quality of SIPPs being written?"
However, there may still be grey areas going forwards. The FSA consultation is very clear about the role of financial advisers with UCIS promotion, but what about other circumstances?
Tilley explains: "The FSA can only influence regulated advisers and the worry from a SIPP industry point of view is the promotion direct by the UCIS provider itself or through unregulated salesmen to inappropriate investors including potential SIPP holders. This has been and remains a major concern to the industry."
Lisa Webster, senior technical manager at Hornbuckle Mitchell says: "Ideally we don't have any direct clients but for historical reasons we have people who joined us with an adviser, but for whatever reason, got rid of them, who want to deal direct. We would have to be competent with that information ourselves."
Tilley explains the steps a SIPP provider can take with a direct client: "While a SIPP provider should not be responsible for making a judgement on the suitability of an asset for an individual client, many including ourselves, require any direct client wishing to invest in a UCIS to certify and in certain cases provide evidence that they are a high net worth or sophisticated investor before it will accept the client and their investment.
"The SIPP industry should not allow itself to be the weak link, permitting investment into such vehicles by those that are unskilled and perhaps undereducated in financial matters. The industry has already had plenty of negative publicity without needing to generate any more by acting against the spirit of the regulator."
While the consultation is a step in the right direction, there are a few questions that need to be answered. We will see what comes out in November when the FSA's view is finalised.
What made financial headlines over the weekend?
To promote 'long-term investment'
Switching 'hard and expensive'
Smaller funds still packing a punch