Better Business: IFAs have been warned on SIPPs

Matt Ward, wealth management consultant at Defaqto, on how IFAs have responded to the FSA's SIPP review.

During 2008 the FSA carried out a review of pension transfer business, which focused on client cases which had been moved from existing pension arrangements into both personal pensions and SIPPs since A-Day.

The Thematic Review was designed to appraise whether client interests were being served by the transfers, and sought to interrogate the role of both the IFA and the pension provider. One of the main concerns was clients were being unfairly caught up in the IFA and provider clamour to jump onto the SIPP bandwagon.

Review findings

The FSA review culminated in the production of a report detailing the findings called the Quality of advice on pension switching, which sought to lay down a standard practice for the advice given and process undertaken during pension transfer business.

In December 2008 Dan Waters, the FSA’s director of retail policy and conduct risk, said:

“Switching into personal pensions and SIPPs from existing arrangements can be an appropriate move for many people, but this is a complex area of business where consumers rely heavily upon advisers.

“We are concerned at the variable results across firms. As a result, we are taking targeted action in relation to firms giving pension switching advice to deal with the risk of unsuitable advice on past and future sales, and to press all firms to meet the standards we expect.”

The main areas of concern highlighted by the FSA with regards to unsuitable advice were:

• Switches involving extra costs without good reason.
• Recommendations that did not match the customer’s attitude to risk and personal circumstances.
• Failure to explain the need for, or put in place, ongoing reviews when these were necessary; and
• Loss of benefits from existing pension schemes without good reason.

The worrying note was the FSA did identify a number of inconsistencies in approach when conducting the review and this has led to enforcement investigation and fines for some of the worst offenders. Defaqto believes other companies will inevitably face investigation and fines during 2010, but hopes the action taken and reminders issued by the FSA will enable companies to take steps to avoid disciplinary action.

In addition to the FSA’s initial observations on the conduct of the IFA review sample, a
subsequent missive was sent out to a far wider adviser audience. The FSA contacted 4,500 advisers to outline their review findings and explore the appraisal of the adviser’s pension transfer business process. Where necessary remedial action is being encouraged by the FSA.

The bottom line here for advisers is they have well and truly been warned on this subject and, with further business case reviews promised by the FSA, they should make every effort to ensure both their pension transfer processes and decision making are watertight.

Required actions for IFAs

The Thematic Review represents a threat to IFA practices which have not covered themselves in glory with their transfer processes and who do not heed the transfer blueprint prescribed by the FSA.

The review represents an opportunity for those IFAs who essentially have a chance to right any past misdemeanours and also for those who emerge from a business review with their heads held high with a newly found status of transfer specialist.

Defaqto would suggest if IFAs have not done so already the following processes and responsibilities must be reviewed with the associated remedies put in place:

• Client fact find
• Client risk profiling
• Product suitability appraisal
• Investment suitability appraisal
• Product selection due diligence
• Investment selection due diligence
• Reporting mechanism for initial product/investment recommendations
• Review mechanism for ongoing product/investment performance and suitability

The overriding issue would seem to be the FSA requires appropriate audit trails to be recorded when these processes are undertaken on behalf of the client.

IFA opinion

In Defaqto’s 2009 SIPP survey we sought to appraise IFA sentiment on the FSA’s Thematic Review by asking IFAs how it had impacted on their SIPP business.

The majority of those IFAs surveyed, 66%, felt the review has had no impact on their SIPP business, which displays an encouraging level of confidence in their existing pensions transfer processes. One must hope this confidence is not misguided but the FSA’s close monitoring of the market will at least serve as a timely reminder to these IFAs.

Just under a quarter of the survey respondents stated they were reviewing the suitability of SIPPs and therefore in this respect the FSA’s work would appear to have had the desired impact.

Finally, 11% of the survey respondents reported a more severe impact in that they are now concerned about recommending SIPPs in the future. Although minor, this is not good news for the providers who may have benefited from their future business.

Additional verbatim comments which were made by IFA respondents to Defaqto’s SIPP survey included the following:

“I’m very concerned about the FSA and their motives behind this review.”

“It has resulted in the review of historic business, which has been a useful exercise. Thematic review has also ensured that process for future business is robust and in line with FSA requirements.”

“I consider the review to be tantamount to restrictive practice. The SIPP proposition is one I would like to see extended to just about all contracts. The number of essentially ‘dead’ paid-up pension funds is being perpetuated by regulatory red tape. In my ideal world each pension contract should be consolidated into a SIPP/Drawdown contract and access to tax-free cash should be much more flexible.”

“We are reviewing past PPP business and utilising SIPPs, or PPPs that are SIPP-able at the touch of a button, where we feel they could benefit clients.”

“As before I would only be recommending a SIPP where I felt it appropriate for the particular client and their circumstances, which I believe is in line with the FSA review.”

When an IFA is appraising individual pension product suitability for their client they can use product type as a rule of thumb. Defaqto believes this can be broadly done through the following categories:

• Stakeholder pension – product with set charging structure, lifestyle fund strategies, internally managed funds.
• Personal pension – product with flexible charging structure, externally managed funds, deferred SIPP option.
• ‘Collectives’ SIPP – product with access to OEICs and unit trusts, fund supermarket link, DFM panel.
• ‘Bespoke’ SIPP – product with access to equities, commercial property, alternative investment assets, investment partner freedom.

The mounting challenge for IFAs here is, stakeholder pensions aside, the lines between products are becoming more blurred and differentiators more tricky to identify.

Indeed the structure of some of the newer personal pension/SIPP product offerings in the market can essentially meet the needs of the IFA and their client across two or three of the product categories listed above.

The differentiators are therefore becoming predominantly investment based and so an IFA can also appraise individual pension product suitability for their client by using their investment approach as a rule of thumb.

Defaqto believes this can be done through the following categories:

• ‘Pick your own’ investments – product with access to the range of mutual funds or SIPP assets required to construct pension investment portfolio; guided or open architecture approach.
• Partially outsource investments – product with access to pre-defined multi-manager solutions and model portfolios or with access to any of these solutions on the open market.
• Totally outsource investments – pension product with access to a pre-defined panel of DFMs or with the flexibility to appoint any DFM from the open market.

More and more IFAs are being encouraged to consider their position with regards to the investment research and decision making process. IFAs need to decide whether they have the appetite, requisite qualifications, time and resource to take responsibility for all aspects of the investment decision making and ongoing portfolio monitoring process.

If the IFA is in the process of making a business decision on their approach to investment advice, they may be able to tie this in with the due diligence process for selecting SIPP business partners.

When IFAs seek investment outsourcing solutions, requiring a separate due diligence process, they need to ensure they are clear on which responsibilities they are losing/retaining within the investment process. Ultimately however the IFA retains the lead client relationship and is therefore responsible for the selection and ongoing monitoring of an outsourcing solution.

Finally, IFAs need to ensure they search the whole of the market for the product which meets the needs of their client. They should know what the product offers in terms of the features, charges and options detailed above and be able to prove they have conducted such a due diligence process in case an audit is required.