New guidance for operators published as FCA begins third SIPPs thematic review

The Financial Conduct Authority (FCA) confirmed that it had written to firms to inform them that the review was underway, and that it would begin collecting information about their practices "in the coming weeks". Reporting on its last review of the sector in October 2012, then regulator the Financial Services Authority (FSA) said that poor compliance with regulatory requirements by SIPP operators, particularly in relation to risk planning and mitigation, could potentially cause "significant consumer detriment".

"We now expect all SIPP operators to demonstrate that they are meeting our requirements," an FCA spokesperson told Out-Law.com. "Where SIPP operators are unable to demonstrate their compliance with regulatory responsibilities and fail to show they have the best interests of consumers at heart, we will take further regulatory action."

A SIPP is a type of personal pension plan which allows individuals to choose how their savings are invested from the full range of investments approved by the Government and tax authorities. They are particularly attractive to higher paid individuals. Contributions to a SIPP count towards an individual’s annual allowance for tax purposes, while benefits paid out by a SIPP count towards an individual’s lifetime allowance.

The latest thematic review is the third such exercise carried out by regulators in relation to SIPPs since the products were brought under the FSA’s regulatory regime in 2007. In a consultation published last year, the then regulator proposed increasing minimum capital requirements for SIPP operators, as a way of covering the cost of winding down an operator in the event of financial difficulty. The FCA is expected to publish its final policy in this area before the end of the year.

The FCA’s finalised guidance covers SIPP operators’ regulatory responsibilities in relation to systems and controls; client money; management information; managing conflicts of interest and relationships with third parties that advise and introduce prospective members; due diligence; and financial crime. No changes have been made to the draft guidance, published by the FSA last year.

The guidance states that all firms, regardless of whether they do or do not provide financial advice as well as products, must treat customers “fairly”, in accordance with FCA consumer outcomes. The guidance states that SIPP operators are not responsible for advice given to their customers by third parties, such as financial advisers; but it does require them to gather and analyse management information that will enable them to identify possible instances of consumer detriment, as well as financial crime. Any instances should be addressed in an “appropriate way”, such as by contacting the firm giving advice and asking for clarification, the guidance said.

In relation to conflicts of interest, the guidance states that firms that give advice on SIPPs as well as administer them must be able to demonstrate that they have “fully considered all the options and their recommendations comply with all the normal suitability requirements”. It includes examples of good practice observed by the FSA during its thematic review in relation to managing relationships with advisory and other third-party firms.

Firms are required to conduct and retain appropriate and sufficient due diligence checks, both in relation to checking and monitoring introducers as well as assessing that investments are appropriate for personal pension schemes, according to the guidance. Enhanced procedures are required if the SIPP operator deals with more risky Unregulated Collective Investment Schemes (UCIS), which will not usually be suitable for the vast majority of retail investors.

Other areas the guidance covers is the need for SIPP operators to ensure that their employees are competent and well trained, and to clearly understand the application of the CASS client money and custody rules to their business, given the weaknesses identified as part of the FSA’s review. The FCA’s Principles for Businesses require all firms to arrange adequate protection for clients’ assets when they are responsible for them.

Pensions expert Simon Laight of Pinsent Masons, the law firm behind Out-Law.com, said that although the publication of the finalised guidance “may not, at first glance, seem like an important development” given the lack of changes from last year’s draft, firms should be careful to familiarise themselves with their regulatory responsibilities ahead of further enforcement action in the sector.

“The FCA already has a track record of pursuing those that do not meet its finalised guidance, and the sector is likely to see a considerable increase in enforcement action over the next two years,” he said.

“Recent enforcement action has shown that the FCA is upping the ante in relation to regulatory non-compliance by SIPP operators, and that trend has only been confirmed by the announcement of a further thematic review of the sector,” he said.