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Do SIPP Firms Face A Due Diligence Issue?

You may have read some of the discussion in the press recently about SIPP firms and "due diligence" - but what does it really mean?

Due diligence is generally regarded by dictionaries to mean something along the lines of “reasonable actions taken to avoid danger to others or oneself.” This matters to potential claims clients who are concerned about their SIPP investments.

There may well be concerns over transfers introduced by unregulated firms, and also when transfers take place into unregulated assets – that is when SIPP firms may well be challenged over a failure of due diligence.

Historically, in respect of a SIPP, the advice firm or financial adviser - as the provider of the advice to invest - was generally regarded as the only point at which a failure of due diligence might be deemed to be actionable. However, since the "pensions freedoms", many people have been persuaded - often by offshore cold callers - to invest into unregulated assets within SIPP wrappers.

Where a pension transfer has taken place from a  pension scheme, into an unregulated underlying asset within a SIPP, this raises a number of due diligence concerns. And it's not simply about potential failures by the SIPP firm.

Firstly, the ceding pension scheme: did the trustees obtain the correct assurances from their administrators in respect of the proposed transfer: was a suitably qualified IFA involved in the advice process ie. a G60 qualified adviser for DB transfers); and secondly, was the receiving scheme properly authorised by HMRC to accept such a transfer?

Secondly, the advice firm (where involved): did they have access to the proper qualifications and permissions to advise upon such a transfer? Importantly, did the intended SIPP, and underlying asset, meet the client's stated attitude to risk at the time of transfer?

Finally, the SIPP administration firm: the main danger is in respect of unregulated introducers – often based offshore, and unregulated underlying assets. Where no UK regulated, and suitably qualified adviser has been involved, the SIPP company faces a real challenge. In the absence of such advice, has the SIPP firm conducted appropriate due diligence on any proposed unregulated underlying asset. Where an unregulated introducer has been involved, in the absence of a UK regulated adviser – has the SIPP company conducted appropriate due diligence re the appropriateness of the proposed transfer on behalf of their client?

This could prove to be a genuine challenge if any form of “marketing” or other relationship exists between the SIPP firm and the unregulated introducer – especially if that relationship has not been disclosed to the client.

When this process breaks down is where dangers will occur and where clients will bring complaints of mis-selling or mis-advice.

The FSCS, following their decision to place three SIPP firms in default (Stadia Trustees, Brooklands Trustees, and Montpelier Pension Administration Services) has made it clear that evidence of failure of due diligence by these firms will lead to compensation payouts. The FOS has also adopted a stance that essentially concurs with the FSCS' position.

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