A Rise in SIPP Complaints

A recent article in Retirement Planner really caught our eye. The final quarter of 2013 saw a 123% increase in complaints to the Financial Ombudsman Service (FOS) regarding SIPPs, from 176 in Q3 to 393 in Q4. This large spike in complaints raises a lot of question about what is happening in the SIPP market. Is it the quality of the investments, poor advice from advisers or lack of due diligence by SIPP providers?

SIPPs have become increasingly popular as investors look to take a more active role in saving for their retirement. There are now more than 1 million SIPPs in the market, with alternative investments being a driver behind growth in recent years – in 2012 about 70% of the funds flowing into alternative investments came from SIPPs. This has though fallen dramatically over the last year due to a large clampdown by the FCA.

Unregulated Investments

The FOS revealed that the majority of recent complaints have been regarding UCIS. There have been a number of high profile unregulated investments that have run into difficulties during the past year, and there is a concern over whether products are being created solely to tap into consumer demand for non-stock market based investments promising higher returns.

One of the main concerns surrounds how the SIPP and the underlying investments were sold. Originally SIPPs were designed for investors who were prepared to make their own investment decisions. The idea of clients being sold the concept of an alternative investment product and then the SIPP in order to purchase that product (where the client was not actually suitable) could cause major problems in the future.

Many of the recent claims to the FOS outline a lack of due diligence by the adviser and SIPP provider and bad investment advice from the adviser. With the lack of regulation, alternative investment providers have been allowed to cut corners and provide misleading and one-sided marketing material, without properly outlining the risks involved.

The Regulator

The FCA restricted the promotion and sale of UCIS to only HNWIs and sophisticated investors from January this year, and has also recently won a court case against Capital Alternatives where the FCA believed they had been illegally operating a collective investment scheme. A number of alternative investments continue to operate without regulation and were not caught by the recent ban, but the outcome of the recent Capital Alternatives court case could result in further claims against these types of investment.

There have been concerns around the tactics being used to bring about claims against SIPP providers. Neil MacGillivray from the Association of Member Directed Pension Schemes (AMPS) noted that at times solicitors have been pursuing claims where the investment has failed, writing to the SIPP providers on behalf of ‘their client’ but where they have not even gained any consent from the investor to act on their behalf.

Outlook

There is no doubt that we will see further complaints in the future and a rise in claims management firms targeting UCIS and other unregulated investment, which has the potential to be detrimental to investors.

We are also likely to see further consolidation of SIPP providers once the new capital adequacy requirements have been brought in. This could be a major problem for smaller firms who may not be able to meet the new requirements, and we could also see the closure of some providers who are over-exposed to alternatives.

But increased regulation should help to drive poor investments out of the market and push advisers to be more proactive when it comes to their due diligence.

It will be interesting to see how the market develops in 2014.