The standard of due diligence checks on SIPP investments is a live issue.
Since 2009, the FCA has conducted three reviews of and issued guidance for SIPP
operators.
In May, the Pensions Ombudsman scrutinised the procedures followed by
one SIPP operator in the case Mr N v Stadia Trustees. This Ombudsman's decision
serves as a helpful reminder of the level of due diligence expected. This
article outlines the case and sets out key points from FCA guidance on
appropriate due diligence.
The facts in brief
In 2012, Mr N invested in a 'high risk' unregulated collective investment
scheme (UCIS) through a SIPP held with Stadia Trustees, a SIPP operator.
The transaction was member-directed arrangement. Mr N signed a standard
declaration confirming that 'the transfer of my occupational pension scheme(s)
is to be conducted on an execution only basis. I have not sought or received
independent financial advice'. As a result he did not have recourse to the
Financial Ombudsman or Financial Services Compensation Scheme. Mr N also
confirmed he understood the investment risks associated with the purchase.
Following completion of a risk assessment form, Stadia suggested that Mr N
invested in a more diverse investment portfolio and flagged that the investment
chosen may not be appropriate. Stadia also warned that its due diligence was a
paper exercise to confirm only that the investment existed and seemed to provide
the services described. Stadia notified Mr N that it would not be responsible
for the financial propriety or performance of the investments.
The complaint
The investment was illegal and failed. Mr N complained that had Stadia
undertaken the appropriate level of due diligence, Stadia would not have allowed
him to invest. Mr N relied upon the guidance issued by the FCA in 2013.
Ombudsman's decision: The Ombudsman dismissed the complaint. In doing so, he
considered the role of Stadia, specifically whether it had acted as a SIPP
trustee or only as a SIPP administrator. As the arrangement was member-directed
with Stadia having no discretion over the investment choices, the Ombudsman
determined that Mr N could not judge Stadia against the higher standard of care
expected from a SIPP trustee when making investment choices. Stadia had only
taken on the role as SIPP administrator, as such, Stadia's duty was limited to
considering whether or not an investment was permitted by HMRC. Stadia had
fulfilled that duty. Further Mr N was wrong to rely upon the 2013 guidance as it
had not been published at the time the investment was made.
Key points for you
This case serves as a helpful reminder of the due diligence requirements on
SIPP operators. Below are some key points:
- Be clear whether or not it is a member directed arrangement with a
SIPP administrator. If the SIPP operator acts as trustee as well as
administrator, there is a higher duty of care owed to the member when making
investment choices.
- Provide clear warnings to members of investment risks and limits of
any due diligence procedures.
- Have appropriate due diligence procedures in place. It is no longer
sufficient to simply check that investments exist. The FCA guidance for SIPP
operators issued in 2013 has raised the bar. Due diligence checks should
cover the following key areas:
- the nature of the investment
- whether the investment is genuine or not
- whether the investment assets are safe eg legal enforceable
contracts
- whether the investment can be independently valued
- whether the investment is impaired eg investment providers are
creditworthy.
Additional care should be taken when dealing with UCIS. The FCA
recommends that SIPP operators should:
- put in place enhanced due diligence procedures
- set KPIs linked to the sale of UCIS to monitor the business they are
conducting
- independently verify third-party due diligence used
- regularly review any due diligence on a UCIS.
If you would like any further information or advice on pensions regulatory
matters, please do speak to your usual contact at Burges Salmon.