Sipp providers could face a wave of fresh claims, after the Financial Services Compensation Scheme (FSCS) ruled firms' due diligence on investments had been inadequate.
Experts have said the ruling could cause FSCS payouts to rise and encourage claims to the Financial Ombudsman Service (FOS) on a similar basis against firms that are still active.
Last week the FSCS declared three Sipp firms in default, with £34 million expected to be paid out, and this could have further implications for Sipp decisions at the Financial Ombudsman Service (FOS).
On Friday the FSCS announced it had declared Brooklands Trustees, Stadia Trustees, and Montpelier Pension Administration Services in default with £34 million provisioned for the investment provision class for 2018/19. The FSCS said it has received 150 claims against these firms with more claims expected during 2018/19.
The names Stadia Trustees and Montpelier Pension Administration Services will be familiar to New Model Adviser® readers as Montpelier’s director was banned by the Financial Conduct Authority (FCA) in 2013 and Stadia Trustees was subject to an Financial Services Authority (FSA) inspection in 2011 before halting business in 2013.
The FSCS said it may now pay compensation if a valid claim is made over these firms.
In 2011 Curtis Banks bought the book of business of Montpelier Pension Administration and in 2016 Mattioli Woods stepped in to wind down Stadia Trustees and moved 1,000 clients to Mattioli Woods own Sipp.
The decision is a first for the FSCS, despite due diligence on investments being a recurring theme in Financial Conduct Authority (FCA) reviews of the Sipp sector and subsequent warnings. In 2014 the FCA wrote to Sipp firms after it found 'unacceptable' and 'significant' failings in firms' due diligence on non-standard investments.
Mark Smith, Mattioli Woods’ chief operating officer, welcomed the FSCS’s decision to allow investors to get compensation back, commenting over half the 1,000 customers who moved over had all their pension funds invested in non-standard assets.
He said the FSCS could not start looking at a raft of claims relating to Sipp providers that it had held back until now.
‘As a Sipp provider you still have responsibility for the pension transfers you accept and the assets that members hold. As a result of the FSCS announcement, we expect to see that claims they have been pushing back for a while will now have to be dealt with,’ he said.
According to Martin Tilley, director of technical services at Sipp provider Dentons, this is a first for the FSCS.
‘I think this is significant and it is the first time it has happened,’ he said. ‘What they are saying is that they are determining the view that the Sipp providers were deficient in the asset acceptance process. Which of course is one of the things the regulator has picked up on in its thematic reviews [of Sipp providers].’
Oil, hotel rooms and vineyards
In a release published on Friday the FSCS specifically referred to investments the three Sipps accepted which were ‘high risk’ and included ‘oil, investments foreign hotel room investments and foreign vineyard investments and made by consumers with little investment experience and modest funds to invest’.
The FSCS said these investments were often made following a cold call by an overseas introducer.
‘FSCS is satisfied that there are claims where the conduct of the Sipp operators FSCS has declared in default gives rise to a civil liability to the investors because the Sipp operators failed to exercise reasonable care and skill, breached regulatory requirements and/or breached trustee duties,’ the lifeboat added.
For the investment provision class, this news will mean Sipp providers and other investment providers will likely fork out around £34 million in levies for the 2018/19 year.
However the ramifications over this decision could be wider than for just the FSCS, but could encourage a new set of claims being made to the FOS.
Julian Penniston-Hill, chief executive of Sipp provider Intelligent Money, said he would ‘assume’ the FOS would also accept claims against Sipp providers if the FSCS is doing the same.
‘It would be unnatural [for the FOS] to do anything other than that, so I would agree that would be a development from this,’ he said. ‘[Although] you can be sometimes surprised by decisions.’
Indeed recent stories have suggested the FOS has already moved to a similar line to the FSCS; as a BBC report revealed last August Sipp firm Carey Pensions had settled a number of claims brought to the FOS against it before final decisions was made.
Those cases also involve an unregulated introducer selling unregulated investments.