While Sipps allow pension investors with a keen interest in the stock market to make their own investment decisions, they have also permitted significant abuse by some corrupt advisers and unscrupulous Sipp companies prepared to allow esoteric investments to be held in them.
Advisers who were both regulated by the FCA and those who were not were very keen to promote investments of an unusual nature simply because the promoters of the investments were prepared to pay significant commissions to the advisers who were able to attract new business. Companies behind promoting investments in overseas property, storage pods, carbon credits, green oil and the like would often pay up to 30 per cent in commission to introducers of new business.
Because of increased competition between Sipp companies, many of the smaller operators were prepared to consider allowing investments to be made in unregulated, esoteric, high risk and illiquid investments within the Sipp wrapper simply to attract new clients who were required to pay disproportionate set-up fees and repeat charges on an annual basis.
Many Sipp operators were happy to promote the investments under the guise that they were environmentally friendly investments. Indeed, Liberty Sipp accepted hundreds of applications to open a Sipp product with their company from an introducer by the name of Avacade Limited who were, in fact, unauthorised by the FCA although they did advise many pension investors to open a Sipp with Liberty Sipp, transfer their monies from their existing pension providers and to invest in what was meant to be a rain forest in Costa Rica where Melina trees were cultivated.
Inevitably most, if not all of the investments in this genre of products failed within the Sipp wrapper, with many pension investors losing their entire life savings as a result of bad advice from both regulated and unregulated advisers. Sipp companies were then no longer able to collect annual management fees because there was no money left in the Sipp cash account, resulting in negative cashflow for these providers, many of whom went into administration.
Where FCA-regulated advisers gave advice, compensation can be obtained up to a limit of £350,000 through FOS. If the regulated adviser is no longer trading, compensation is capped by the Financial Services Compensation Scheme (FSCS) at £50,000 for advisers declared to be in default prior to 1 April 2019 and £85,000 for advisers declared in default after that date.
The case of Adams -v- Options, which was considered by the Court of Appeal, clarified the law relating to the potential liability of a Sipp operator where the introducer of the business/adviser was not regulated by the FCA. In that case Mr Adams was persuaded by a firm of unregulated advisers based in Spain to open a Sipp with Options, to transfer his defined contribution pension into the Sipp and to thereafter invest in storage pods. The storage pods were later considered to have little or no value. The Court of Appeal considered that the Sipp operator was liable to Mr Adams as the Sipp operator failed to carry out sufficient due diligence on the unregulated introducer/adviser. Options are understood to be applying to the Supreme Court for leave to appeal that decision.
But for Sipp companies that have gone into administration and who have now been declared to be in default, compensation is now being paid by the FSCS for failed investments which were introduced to them by unregulated advisers where the FSCS is satisfied that the Sipp operator failed to carry out sufficient due diligence on the introducer.
It was previously considered that a Sipp operator could escape liability if the opening of a Sipp and the underlying investments were recommended by a financial adviser who was regulated by the FCA. But a very recent decision from Ross Hammond, Ombudsman at FOS, found that a pension investor is entitled to compensation for a failed investment within the Sipp if the Sipp company failed to carry out sufficient due diligence on the regulated adviser.
In this case the Ombudsman found that Rowanmoor Personal Pensions Limited failed in its regulatory duties when it failed to verify the integrity of the firm that introduced the application, namely CIB Life & Pensions Limited. It ordered compensation to the pension investor for the loss suffered as a result of a Sipp investment in a property marketed by The Resort Group in Cape Verde.