Guest Blog: Why the latest FOS ruling isn’t a ‘game changer’ for SIPP providers


Guest Blog AJ Bell 150pxIn his first Guest Blog for Investment Sense Gareth James, Technical Resources Manager at AJ Bell, looks at the latest ruling from the Financial Ombudsman Service, which has divided the Self-Invested Pension industry.

It was with a slight sense of trepidation that I took on Investment Sense’s invitation to consider whether the Financial Ombudsman Service’s decision to uphold a complaint in respect of a Sustainable AgroEnergy investment could be described as a game-changer for the SIPP industry.

It is worth considering what the term game changer means. A quick search brings up the description “an event, idea or procedure that effects a significant shift in the current way of doing or thinking about something”.

First things first, lets look at the facts

Before coming back to consider how accurate that is, let’s look at some of the detail.

Gareth James, Technical Resources Manager at AJ Bell

Gareth James AJ Bell

Contact Gareth on:

0845 40 89 100

The complaint was brought by Mr A and related to an investment of £24,195 into an unregulated investment, Sustainable AgroEnergy. Mr A instructed his SIPP (Self-Invested Personal Pension) provider to make the investment in 2011. The transfer value paid into his SIPP was £29,394.40. Mr A did not receive advice from a regulated adviser, but met a representative of an unregulated agent who had an introducer agreement with the SIPP provider.

Before making the investment Mr A was provided with a significant number of warnings about the risk of this type of investment by the SIPP provider. Amongst these it was made clear that acceptance of the investment did not mean the SIPP provider endorsed it, or that this meant it was suitable for Mr A. The provider confirmed that the suitability of the investment rested with Mr A and his advisers.

In response to the risk warnings provided by the provider, Mr A made a number of declarations indicating that he had read the risk warnings and was aware of the high risks of making the investment.

Why was Mr A’s complaint upheld?

So, if a SIPP provider has given its client comprehensive warnings of the risks associated with this type of investment and the client has confirmed that he has read those warnings and still wishes to invest, if the investment fails and the client complains that the SIPP provider should not have allowed him to invest, why would the Ombudsman decide to uphold the complaint?

The Ombudsman’s provisional decision in this case mentioned four factors focussing on two.

Reason one was that the Ombudsman did not feel the provider had followed the guidance published by the FSA as part of its thematic review of SIPP operators in September 2009.

Reason two was given as the provider not making enquiries to establish the likelihood of the investment being suitable for Mr A. The Ombudsman pointed to the unusual nature of the investment, the fact that the SIPP was Mr A’s sole pension provision, and the lack of a regulated introducer when considering this point.

In reality these two reasons are closely linked. The reported failures given in relation to the second reason would potentially not have been deemed failures without the recommendations that came out of the FSA’s 2009 SIPP thematic review.

Putting some of the recommendations of the 2009 thematic review in the context of this complaint the FSA said that SIPP providers could consider:

  • Confirming that intermediaries were authorised and regulated by the FSA; as detailed above there was no authorised intermediary in this case
  • Recording the type and size of investments recommended by intermediaries, so that potentially unsuitable SIPPs can be identified; this was a low value SIPP and the bulk of the funds in the SIPP were invested in a single investment
  • Identifying anomalous investments to enable a firm to seek appropriate clarification of the suitability of what was recommended; the Ombudsman does not comment on whether the SIPP provider identified the investment as anomalous but does find that the firm did not seek appropriate clarification of suitability
  • Identifying instances of execution-only clients; the lack of a regulated adviser here means that the client was effectively execution-only.
  • Identifying clients who waive cancellation rights; Mr A waived his cancellation rights in this case

So it seems that the Financial Ombudsman upholds the complaint because it feels that the SIPP provider did not follow the guidance provided by the FSA in 2009.

The Ombudsman’s decision has been criticised and there is arguably some logic to this. Client A made the investment choice, he received detailed warnings from his SIPP provider regarding his investment choice, he acknowledged to them that he understood those warnings, and still proceeded with the investment. Based purely on those circumstances, it does not appear logical that the fault lies with the SIPP provider.

It is a bit like blaming Bosch if, having read all the warnings about not using metal containers in microwaves, your microwave explodes when you cook your Cornish pasty on a baking tray.

I’m not sure how wise it is to continue the microwave analogy, but the issue SIPP providers now face is that they should apparently be building products which don’t just flash warning lights when you try to use a metal tray, but actively prevent it being put in the microwave in the first place!

Not a game-changer

So is the ruling a game changer? I would say no. Arguably any SIPP provider changing their game in mid-2014 as a result of guidance provided by the FSA five years ago did not understand the rules of the game, or at least the importance of listening to the referee.

The game changer, or more accurately game changers, have been the announcements from the regulator over the last five years. The 2009 thematic review, the capital adequacy consultation, the 2011 thematic review, and the recent Dear CEO letter should each have acted as flags for SIPP providers to look at their processes.

Advisers and investors are already likely to have seen many SIPP providers tightening up their investment processes as a result of each regulatory publication. For those providers that haven’t reacted, a risk is that the most important game changer will be to their finances – on an ongoing basis in terms of the cost of meeting the FCA’s capital adequacy requirements, and on a sporadic basis in relation to FOS-led compensation payments.

For their clients, the game changer may be increased SIPP charges, or reduced investment choice either at provider level or in the form of a permitted investment list. Hopefully they won’t need to find a new SIPP if their chosen provider withdraws from the market.

Note: This article reflects the view of the author. It does not necessarily reflect the view of Investment Sense Limited. The article has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog and the reader should accept that by its very nature many of the points are subjective and opinions of the author.

About the author

Gareth James AJ Bell Gareth James joined AJ Bell in April 1997 and, as the company’s first SIPP administrator, helped establish what is now the Platinum SIPP.In 2000 he became the first member of the administration team for the AJ Bell Youinvest SIPP, the UK’s first online SIPP for execution-only investors.

In 2006 Gareth set up AJ Bell’s technical team and is now responsible for analysing regulatory and technical material and communicating this within AJ Bell and to clients and advisers through a variety of channels.

You can find Gareth on Twitter at @sippyslicker