Untangling the knots of SIPP investment due diligence

I recently heard someone talking about a ‘Gordian Knot’.

This is an expression that comes from a legend about Alexander the Great. An oracle had declared that any man who could untangle a particular knot on a wagon in ancient Gordium was destined to rule all of Asia.

Alexander, rather than trying to actually unravel it, just sliced through the whole thing with his sword. And the rest, as they say, is (literally) history.

Nowadays, a Gordian Knot is shorthand for an intractable problem that can be solved easily by finding a loophole or by thinking creatively – a bold solution to a complicated problem.

I’d never heard of it before, but it’s a good expression, and it came to mind again the other day off the back of the FSCS’s summary note on the three SIPP operators it recently placed in default.

It seems once again the financial services sector has found itself tied up in knots by the issue of SIPP investment due diligence – in particular, who is responsible for it.

Looking back, there have been various attempts to untangle the issue. However, we still seem to be having the same conversations.

The FSA’s thematic reviews in 2012 and 2014 highlighted poor practices in terms of assessing and monitoring new investments, not to mention conflicts of interest, and SIPP providers were warned to get their act together over their due diligence.

Meanwhile, some SIPP firms were being challenged by the Financial Ombudsman Service over claims they did insufficient due diligence on UCIS investments that they permitted.

The recent FSCS pronouncements again look at the providers, and seem to have opened the door to claims where SIPP providers are perceived to have “failed to exercise reasonable care and skill, breached regulatory requirements and/or breached trustee duties”.

However, there have been counter-arguments by the SIPP trade body, AMPS, that it is premature for the FSCS to conclude that the SIPP provider has legal responsibility for vetting investments.

It’s interesting as well that The Pensions Ombudsman has at times taken a different view to the FOS in absolving other SIPP firms of blame in claims similar to the FOS cases.

Furthermore, the FOS has also upheld claims against financial advisers for faulty advice in respect of SIPP investments that went bust.

Therefore, I’m still not sure we’re any the wiser as to who bears ultimate responsibility. Is it the SIPP provider? Is it the adviser? Is it the customer?

There’s a case to be made for any of the parties involved, and I can understand why there is a debate. When there are such large sums of compensation on the line, however, we need absolute clarity from a legal and regulatory perspective.

So if I were Alexander the Great, what would I be thinking? First and foremost, customers need protection. I think everyone involved is agreed on this. Secondly, there needs to be a clear set of rules.

With this in mind, why not cut through the thematic reviews, ombudsman precedents and FSCS treatment, and return to a permitted investments list, similar to what was in legislation up until 2006.

In other words, a personal pension can only hold an investment if it appears on that list. If a SIPP provider is permitting investments outside that list, the FCA steps in and takes action. The customer is protected. Everyone knows where they stand.

This works in the context of ISAs where the regulations contain something similar in the form of ‘qualifying investments’. (When was the last time you heard about dodgy investments in an ISA?) So why not pensions?

I’ll be the first to admit there may be better solutions. But either way, the SIPP industry needs bold action to cut the Gordian Knot and solve this problem once and for all.

Technical Team Leader

After completing his postgraduate studies at Lancaster University, Martin spent two years working for a leading insurance company before joining AJ Bell in April 2007. Martin worked initially on the AJ Bell Investcentre product before moving to a technical role in 2009. His main focus is providing technical support to the various teams and departments within the business. He is also involved in delivering training to staff on the rules and regulations that affect our customers.