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Out-Law News 2 min. read

FSCS to consider claims for SIPP investment losses based on negligent advice


Customers who transferred their pension savings to a self-invested personal pension (SIPP) after receiving negligent advice from a firm that is no longer in business will now be able to claim for investment losses, the Financial Services Compensation Scheme (FSCS) has announced.

The announcement will particularly benefit SIPP customers who invested their pension savings into three failed schemes: Green Oil Plantations Ltd, Harlequin Hotels and Resorts and Sustainable AgroEnergy Plc. The FSCS had previously compensated these customers on an "interim" basis, but only for lost pension growth and charges on the funds that they transferred from their existing pension to the SIPP.

Pensions expert Simon Laight of Pinsent Masons, the law firm behind Out-Law.com, said that the announcement extended the same right to compensation already available to non-pension investors to the pensions world.

"Previously, the FSCS had been hesitant about whether failed unregulated investment should be compensated for, if the IFA limited their advice to pension transfer advice and excluded investment advice," he said.

"However, the FCA has been clear for a while now that if pension transfer advice covers transferring to a SIPP, then it must also include an assessment of the underlying investment, even if the adviser has sought to exclude investment advice from the service. The FSCS has now confirmed that it agrees with the FCA's analysis," he said.

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. This makes them particularly attractive to higher paid individuals. However, the Financial Conduct Authority (FCA) has issued a number of warnings reflecting its concerns that some SIPP customers were not fully aware of the risks of the products, particularly of investing assets in non-standard asset classes.

In its latest alert, issued in April 2014, the FCA said that firms could not advise on the suitability of a pension transfer without considering "both the customer's existing pension arrangement and the underlying investments intended to be held within the SIPP". The Financial Ombudsman Service (FOS), which handles complaints by individual consumers against financial firms, reported a sharp increase in SIPP cases last year, many of which involved the suitability of advice.

The FSCS said that it had handled around 300 SIPP-related claims against advisers that were no longer trading since September 2014, many of which would now require "top-up compensation" to cover investment losses. All claims will be subject to the standard £50,000 investment limit. The rule change reflected the FSCS' new position that IFAs may be "legally liable" for investment losses as they could not "restrict their advice to the suitability of the SIPP, without considering the suitability of the investments to be held within the SIPP", it said.

"Each case will be considered on its own facts but the IFA may be liable for the losses caused by the negligent advice to switch to a SIPP and hold certain investments," it said in a statement. "When considering future claims, we will be able to take into account claimants' full losses up to our investment compensation limit."

Pensions expert Simon Laight said that the FSCS would only pay out "if the IFA's negligent advice caused the loss".

"If another party is partly responsible, the FSCS might not pick up the full bill," he said.

"It remains to be seen whether the FSCS will seek to lay off some of its risk by putting the blame, in part, on other parties - SIPP operators being the obvious target. The FCA has frequently reminded SIPP operators of their own obligations before allowing unregulated investment into the SIPP wrapper. The problem is that, even now, the extent of these obligations is not clearly defined by the FCA," he said.

The FSCS is funded by contributions from over 16,000 participating firms, but Laight said that it was unlikely that this levy would increase "dramatically or permanently" as a result of the new rules.

"The FCA has tightened up the rules on the promotion of unregulated investments, significantly reducing deal flow and therefore the incidence of the FSCS having to step in," he said. "It's largely a legacy issue."

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