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Advisers back FSCS's due diligence ruling against Sipp providers

Jack Gilbert finds that although the Financial Ombudsman Service is not bound by the Financial Services Compensation Scheme’s decision to accept due diligence claims against Sipp providers, claims management firms are already circling.

Advisers back FSCS's due diligence ruling against Sipp providers

The Financial Services Compensation Scheme’s (FSCS) decision to accept claims against three Sipp providers earlier this month could prompt a wave of claims regarding due-diligence failings. There is no solid precedent for due-diligence-based complaints to the Financial Ombudsman Service (FOS). But legal and regulatory technicalities will not stand in the way of claims management firms, which are taking the FSCS’s move as a green light.

The FSCS declared Brooklands Trustees, Stadia Trustees and Montpelier Pension Administration Services in default with £34 million expected to be paid out. The Sipp trade body immediately responded with a letter calling for ‘urgent comments’ from the FSCS.

Zachary Gallagher, chairman of the Association of Member-Directed Pension Schemes (Amps), said by declaring the three Sipp operators in default over their due diligence on investments they accepted this could lead to ‘increased risk of Sipp operator failure. This is because operators face the cost of defending claims seemingly encouraged by the FSCS’s action.’

Unregulated investments

In its decision the FSCS made particular note of unregulated investments accepted by the Sipp firms. These include ‘oil investments, foreign hotel room investments and foreign vineyard investments’ as well as the presence of unregulated introducers.

The Sipp industry is clearly concerned by what the FSCS said, and is trying to stop these decisions setting any kind of precedent for further claims or regulatory actions. Gallagher said Sipp providers ‘had no regulatory authority’ to advise its members for or against investments. In any case, there was ‘no proven responsibility for due diligence’. But advisers still think Sipp providers should be held accountable for the investments they accepted.

‘The writing has been on the wall for non-standard investments for some time,’ said Alistair Cunningham (pictured above), financial planning director at Surrey-based Wingate Financial Planning.

‘Sipps are trustees and they have a duty of care for the members. The trustees should be validating the investments they [members] are in, [making sure] that they are broadly appropriate. That is not to say doing a risk profile for the investments or looking into every single fund, but stuff that is unauthorised and illiquid is an issue.’

Stephen Girling, managing director of Norwich-based IFA SG Wealth Management, said there has been ‘a gradual move towards Sipp firms needing to have accountability’.

‘Perhaps those who were asking fewer questions are the ones who end up with the more esoteric investments and therefore the problems,’ he said.

Girling said ‘it could well be the case’ that some Sipp providers end up closing down because of claims being brought against them in light of the FSCS’s latest announcement. ‘What worries me is what we have seen with advice firms almost run on the basis of making hay while the sun shines. We could also see that here.’

In September 2016 rules came into force for Sipp providers that required them to have higher amounts of capital on their books, depending on the amount of non-standard assets they hold.

The FOS factor

The FSCS is a lifeboat for failed firms. Its statement around investment due diligence claims related to three Sipp providers that had already collapsed.

Technically, though, Amps need not worry. The FSCS may have said in its recent decision that it found ‘unacceptable’ and ‘significant’ failings in the firms’ due diligence on non-standard investments. But the FSCS operates separately to the FOS and its decisions do not bind the FOS in any way.

A note on the FOS website explains: ‘The FSCS is completely separate from the Financial Ombudsman Service and it has its own, different rules.’ Sharing between the two amounts to information about a case only.

And yet, some of those running Sipp firms seem to think it would be unlikely for the FOS to decide in the opposite way were a similar case to come across its desk. 

Julian Penniston-Hill (pictured above), chief executive of Sipp provider Intelligent Money, said: ‘It would be unnatural [for the FOS] to do anything other than that. So I would agree that would be a development from this.’ Penniston-Hill did add a caveat however: ‘You can sometimes be surprised by decisions.’

Others beg to differ. In 2012 the FCA’s predecessor, the Financial Services Authority, issued a thematic review of Sipp providers. It said: ‘Poor compliance with regulatory requirements, particularly in the area of risk planning and mitigation, has significantly increased the risk posed by Sipp operators.’

Greg Kingston, Sipp provider Curtis Banks' head of communications, said the interpretation of this FSA 2012 thematic review investments is significant for any potential claims.

‘There was a different understanding and different expectations at that time, and then after that ruling I think expectations were raised,’ he said. 

‘Whatever sort of Sipp provider you were, you sharpened your pencil at that point. We are where we are with some of the earlier investments into Sipps. I think it’s a different matter for some of the later ones.’

Kingston (pictured above) pointed to a Pensions Ombudsman ruling that found in favour of the Sipp provider, Standard Life, after a client had invested in an unregulated bond.

The Pensions Ombudsman ruled that at the time the client made the investment, in 2009, the Financial Services Authority (FSA) had not yet issued its October 2012 guidance. This said Sipp operators should have controls in place to enable them to ‘identify possible instances of financial crime and consumer detriment’. Therefore he ruled in favour of the Sipp provider as the investment had been made at a time when ‘due diligence on investments had been less stringent’.

But the separation of complaint handling bodies cuts both ways, and for Kingston’s argument it works against the Sipp provider. A memorandum of understanding between the FOS and Pensions Ombudsman states: ‘Because they’re different organisations with different rules and powers, the Financial Ombudsman Service and The Pensions Ombudsman take different approaches to considering complaints – and their answers might be different.’

Claimants, choose your weapons

Regarding the two ombudsmen, the onus is on complainants to pick, at the outset, whichever one is most suitable for their complaint, and most likely to find in their favour.

In terms of the FOS’s relationship with the FCA, a 2015 memorandum states that both will ‘seek to achieve a complementary and consistent approach, so far as that is consistent with their independent roles’.

Nevertheless, claims are already under way.

One claims firm, Neglect Assist, is bringing forward cases against Sipp provider Carey Pensions involving due diligence.

Tim Hampson, a senior associate at Neglect Assist, said he is basing cases against the Sipp firms on the involvement of an unregulated introducer. This is something the FSCS also pointed to in its ruling against three Sipp firms.

When asked about the claims by New Model Adviser®  in August 2017, Christine Hallett, Carey Pensions chief executive, said she ‘fundamentally disagrees with some of the findings of the FOS’s provisional decisions’. She also said her firm did carry out appropriate due diligence on introducers and never provided advice on underlying investments.

Hampson said the FSCS’s recent decision could prompt more claims management firms to come forward and to use the ruling.

‘There will be claims management firms looking to farm these types of claims,’ he said. ‘We would argue people need representation to make the correct arguments. But if you Google Stadia Trustees (one of the Sipps declared in default) you will now find claims management companies looking for claims.’ 

Hampson is not the only one pursuing Sipp firms in the courts. Berkeley Burke is currently in a legal battle over a FOS decision from 2014 that found against it over due diligence on biofuel scheme Sustainable AgroEnergy.

In his letter to the FSCS Amps chairman, Gallagher, who is also a director of Berkeley Burke, said the FSCS’s pronouncement could be ‘prejudicial’ against Sipp providers seeking a judicial review following a FOS decision, though he did not specify whether this was Berkeley Burke.

Small players in the firing line

Hampson said the smaller Sipp players have most to lose from the FOS taking a favourable view towards due-diligence-related claims.

‘In the long term, it is going to have an effect. It will be the smaller operators that were accepting applications from unregulated introducers [where there will be an effect]. So I would have thought these companies should have seen this coming,’ he said.

The combination of new capital adequacy rules as well as the cost of defending Sipp claims, whether they have merit or not, is likely to take its toll on certain Sipp providers over the coming months.

Whether or not more Sipp firms end up being declared in default by the FSCS is likely to depend on what the court decides.

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