The success of Sipps has brought its own unique set of pressures onto providers and the regulatory spotlight that now shines on them may not help, finds Pam Atherton

Sipps are under the spotlight as never before. With an estimated 550,000 of them in existence in the UK, provided by some 110 providers and worth close to £75bn, they are rapidly becoming a mainstream savings product.

But with success comes great scrutiny. Small wonder, then, that the FSA has conducted two thematic reviews over the last two years involving Sipps.

In December 2008, the FSA conducted a thematic review of 60 small Sipp operators to determine the extent to which they were adhering to its principles and rules.

The financial watchdog found that some Sipp operators were falling short of its TCF (Treating Customers Fairly) requirements, that there was "a relatively widespread misunderstanding" of their responsibility for the quality of the Sipp business they administered and problems with firms' systems and controls; including their training and competence regimes.

There were also concerns over the accuracy and transparency of document illustrations and the disclosure of charges.

Following the review, the FSA wrote to the senior management of every small Sipp operator explaining its findings, particularly in the area of TCF and their relationships with firms which give Sipp advice.

In another FSA thematic review in 2008, on pension switching advice since A-day (covering switches from all types of pension schemes into personal pensions and Sipps), the regulator found unsuitable advice in 16 per cent of the 500 transfer cases reviewed. In a quarter of firms, a third or more of the cases reviewed were assessed as unsuitable.

Again, following that review, the FSA wrote to over 4,500 firms which advise on pension transfers, setting out its findings, the standards it expects and the action firms should take to ensure customers receive suitable advice. Several firms have been subject to enforcement investigation as a result of the significant failings identified.

The main causes of unsuitable advice were switches involving extra costs without good reason; recommendations which 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 FSA is currently reviewing firms' compliance with its feedback and will report further on its findings in 2010.

Complaints
The concern from the FSA is not misplaced. The Financial Ombudsman Service (FOS), which deals with complaints regarding pension sales and marketing, reports an almost 20 per cent increase in Sipp complaints in 2008, having received 331 of them between October 2008 and September 2009, compared to 276 complaints in the same period a year before.

"Around half (of the complaints) we receive are concerned specifically with the appropriateness of the Sipp for the individual customer. The other half is primarily concerned with the administration of the Sipp," says Paul Bicknell of the FOS.

The Pensions Advisory Service (TPAS) has also flagged an increase in disgruntled savers, particularly regarding the suitability of Sipps for ordinary investors.

In its annual review, published in July 2009, TPAS said that many complainants were not using the wider investment choice offered by the product, despite the fact they were probably paying higher charges.

It states: "We dealt with a number of enquiries from people with self invested personal pensions, some of whom had clearly not understood the level of personal responsibility they had taken on. This would appear to indicate that the product may not have been appropriate for them."

TPAS chief executive Malcolm McLean has gone on record saying that people who invest in Sipps ought to be "reasonably sophisticated investors".
"The value of a Sipp is to take advantage of the flexibility and other things that it offers and if the customer does not need that, or does not want it, they probably should not be in a Sipp," says McLean.

"We have definitely come across people who were in a Sipp without actually realising what the benefits were compared to an ordinary personal pension and were probably paying extra charges in consequence of that."

TPAS technical director, Des Hamilton, says that a large number of complainants were put into a Sipp due to the fact that their employer offered a Group Sipp, and now claim to have been unaware that they were invested in the stock market.

This occurred where they had been put into a Sipp default fund, (usually a balanced or managed equity fund) by their employer as part of a Group Sipp arrangement.

Regulating advice
Hamilton expresses concern that the sale of a Group Sipp to an employer - where no individual advice is given to employees - is not a regulated activity.

He says that TPAS has discussed the matter with the FSA, which says that its regulation only applies to the advice given to individual policyholders.

"This is a big gap in regulation and I believe there is a concerted effort by salespeople to avoid giving individual advice, so that if it all goes wrong, the adviser isn't on the hook for mis-selling," argues Hamilton.

"All the adviser gives to the firm is booklets which count as information, not advice. The sales process between the salesperson and the employer urgently needs to be brought into regulation."

A number of FTSE 100 companies, such as BT, have adopted Group Sipps. If no advice is given, large numbers of ordinary employees can find themselves invested in Sipps, with little or no understanding of the product.

John Moret, marketing director at Suffolk Life is also concerned about the haphazard regulation surrounding the savings vehicle: "(They) were launched in 1989, but the regulatory framework for the operation of Sipps was introduced in haste in 2007."

Pre-2007
Prior to 2007, Sipps operated in a twilight regulatory world, with all sorts of anomalies in the interpretation of grey areas such as stock and cash reconciliation requirements, capital requirements and compensation arrangements, let alone the actual sales process.

The FSA is now suggesting that compliance for individual Sipp advice should fall onto the Sipp provider (rather than the distributor) and that Sipp providers should routinely record and review the type and size of investments recommended by advisers and request copies of suitability reports.

Moret says this puts the Sipp operator in an impossible position. "These recommendations would appear to imply that a Sipp operator is expected to determine whether the advice given by an adviser is suitable, even though a Sipp operator is rarely in possession of all the facts.

Given the FSA's recent scrutiny of Sipps and the upcoming Retail Distribution Review (RDR), now might be a good time for reform of the regulation of the sales process of all group personal pensions, Sipps included.

The sale of Group Sipps by an adviser to a firm, where there is with no individual employee advice, remains a serious regulatory lacuna.

A spokesman for the FSA says this was "a regulatory quirk" and that it was up to the Treasury to amend the legislation if need be.

Clearly the issue of who pays for employee advice needs to be resolved, but this is not insurmountable. Some employers already pay for this as a means of protecting themselves from future complaints from disgruntled workers about inappropriate pensions having been foisted on them.

Let's hope someone at the Treasury is listening.

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