Two recent Financial Ombudsman decisions are crucial reading for the SIPP industry. Fiona Murphy looks at the issues.
The Financial Ombudsman Service (FOS) has recently taken two high-profile decisions on SIPPs. The first involved the FOS revisiting a ruling concerning SIPP operator Berkeley Burke, which led to questions over due diligence practices and suitability of high-risk investments.
In 2011 an investor, referred to as Mr A, transferred £29,394 from a personal pension plan into a SIPP through Berkeley Burke after being introduced by an unregulated agent.
He invested £24,195 in Sustainable AgroEnergy, an unregulated investment. The firm went into administration and Mr A lost his entire fund, going on to bring a case against the provider to the FOS.
The Ombudsman initially ruled the firm should have carried out further suitability checks and upheld the complaint against Berkeley Burke. However, it has recently removed the decision from its website ahead of a review.
In a statement, FOS explains: "The Ombudsman issued a decision in June. Following the decision, the business commenced the judicial review process. The outcome of that process was that the Ombudsman will now consider the complaint afresh."
Twist in the tale
So what are the reasons behind this U-turn? Dentons Pension Management director of technical services Martin Tilley says: "A solicitor said when this case was first released, it is a real game changer and SIPP providers will be petrified by this. I don't think that is the case.
"In this instance, a client had been introduced to the provider by a non-regulated intermediary, allegedly had an agreement in place with an introducer.
"I don't know about that. If they did, I believe the FOS decision holds some weight. The 2009 SIPP thematic review made it a requirement for SIPP providers to review sources of where business was coming from.
"If there was an agreement, this unregulated intermediary would have been regarded as an introducer. In that instance, it was incumbent on the SIPP provider to look at the type of assets introduced through the intermediary. In that case, I think there is weight to the FOS argument."
He adds: "There is a weakness in that the FOS says 'I would have expected the SIPP provider to have made additional enquiries about the investment'. The Ombudsman does not say what enquiries should have been made. The SIPP provider made it clear it was not proving advice.
"The client's attitude to risk versus the underlying investment is clearly in the domain of the adviser or the individual. What the provider should do is ensure the client knows they are entering into a high-risk investment but without drilling down into the in-depth knowledge of the investment itself. I don't think that has changed."
Talbot and Muir head of technical support Claire Trott says: "The initial ruling in favour of the client was not a total surprise when you look at all the issues surrounding this particular case. The assertion that the suitability of the investment for the particular client is not the responsibility of the SIPP provider is technically correct.
"But there were clearly other issues in this case. The investment may well have been suitable for some SIPP investors, yet a SIPP with a single investment is unlikely to be the right thing for a client with such a small fund value.
"It would have been flagged at that point to our compliance department for further investigation and the adviser would be contacted to ensure they were aware of the target market of a bespoke SIPP.
"Even if the fund value had been higher, the investment in a single asset again would have rung alarm bells and the adviser would have been contacted."
She continues: "We are trustees of the pension scheme as well as the provider, and because of this we do have a responsibility to the client for their best interests. This is why we feel that if the product is not being used for its designed purpose, then we would be happy to refuse business.
"As trustees, it is also our responsibility to ensure that the investments made are pensions suitable and not just non-taxable under HM Revenue & Customs rules. To this end, we operate our own permitted investment list.
"We have strong relationships with advisers who introduce clients to us, and we insist we have an introducer agreement with them before any business is accepted."
AJ Bell technical resources manager Gareth James says the ruling itself should not mean a great deal of change for SIPP providers: "The findings are based on the Financial Conduct Authority's (FCA) expectations of SIPP providers that have been evolving through guidance for over four years. Each thematic review of SIPP providers should have been the catalyst for change, not an FOS ruling several years later.
"The news that the FOS may be reviewing its original decision should not leave SIPP providers in a state of limbo. Change should not be driven by the risk of an adverse FOS decision but by the FCA's requirements, and there has been a clear direction of travel on those for several years."
£9,000 SIPP commission
The second FOS case concerns a complainant, Mr S, who arranged his SIPP through HSBC in January 2010 with regular monthly contributions of £5,000 being paid. Commission of £9,000 was paid to HSBC, which was deducted from the SIPP over a period of 12 months.
Mr S said he believed the commission was paid when he set up the SIPP to cover ongoing management and advice of his SIPP. He wanted HSBC to compensate him in recognition of all the additional costs he has incurred as a result of errors.
Mr S complained that he lost money during a property transfer process as a result of HSBC errors and expected compensation for the commission levels and service issues.
Ombudsman Terry Connor ruled: "While of little consolation to Mr S, I do though acknowledge that initial commission of £9,000 when measured against monthly contributions of £5,000 is a significant sum.
"However, I am not persuaded by the evidence I have seen that I should conclude that Mr S only accepted this relatively high cost because he had a reasonable expectation that he would receive future advice from HSBC at no additional cost."
The Ombudsman ruled that HSBC should pay Mr S £1,000 to compensate the poor service he received.
However, £9,000 commission does look excessively high, particularly in relation to £60,000 per year of SIPP contributions. Was the right decision taken?
Trott says: "The level of fees taken in the HSBC case was very high and the client clearly did not understand what he was being charged for. It should have been made clear the level of the fees, and disclosed both by the adviser and the product provider in an easy to understand way. The fees should have been shown by the provider on the illustrations presented to the client.
"Customer-agreed remuneration should not allow this to happen and the level of these charges should have been obvious to the provider who should, even if they are part of the same company, have flagged the issue with the adviser at the time. Fees within bespoke SIPPs are clearly spelt out and on the application form, the client signs it.
"There is no smoke and mirrors involved. By using an independent financial adviser rather than one associated with an insurance company or provider, clients should be aware of charges even before a product is or is not recommended."
Trott continues: "SIPP providers operate decency limits on initial and ongoing fees, which flags up excessive charges. These are not published to stop advisers from using those providers that will allow more than others.
"But it is not uncommon for advisers to be generally aware of the levels for a particular company. Any fee that is taken by an adviser over these limits will be recorded and, in some cases, questioned to ensure the client is aware of the level."
However, Tilley says: "When I first looked at this ruling, I thought the commission levels did sound like a lot of money. But when you consider that IFAs have to put together from scratch the proposal whereby an individual has to fund a pension – including transfers; they want a commercial property and there is borrowing involved – it is not unusual to have a fee of several thousands of pounds.
"From that perspective, if the advice included the background information – putting together the whole process, including the commercial property into the SIPP – it looks more reasonable.
"In this instance, it looks disproportionate compared to the amount of money in the SIPP as the Ombudsman says. But we haven't seen the 'reason why' letter. We don't know how much advice and information was in there."
He concludes: "The reason why letter should have clearly set this out. It did say this fee is for initial advice; the point was raised whether it might be in connection with the transaction; it might have covered the feasibility study; fact find; putting together the report;, setting up the pension; and sourcing the commercial property. So, the fact that it relates to a small amount of money makes it look disproportionate."
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