Self-Invested Personal Pensions (or SIPPs) can offer many advantages over traditional pensions. However, in January the FSA had to warn financial advisers of the increasing number of SIPP schemes with underlying investments in overseas property.
Self-Invested Personal Pensions (SIPPs) can offer various investment advantages over traditional pensions, such as flexibility and complete investment choice.
However, in January the FSA posted an alert, which warned financial advisers to be careful regarding the suitability of investment advice, after there was an increase in the number of SIPP schemes with underlying investments in overseas property purchased through Harlequin.
It warns that there should be a development to the advice given by a financial adviser. For example, if the adviser is aware that a customer will sell their current investments to invest in an overseas property then, when recommending a SIPP, the suitability of the overseas property investment should be included in this advice. Hence, if the original investment is more suitable, the financial adviser will need to explain why the overseas investment is not suitable for the customer via the customer SIPP.
As there have been a number of high profile failures in the SIPP industry, specifically within firms offering overseas investment, regulators have become increasingly concerned and now plan to put in place new capital adequacy guidelines for SIPP providers.
These new guidelines will ideally avoid placing an investor’s assets at risk by increasing the adviser’s understanding of regulatory requirements and will protect against sudden liabilities.
They are likely to impose tight restrictions and it is warned that advisers should conduct thorough due diligence on their SIPP providers, to guarantee they will meet the capital adequacy rules.
What will this mean for our clients?
Our clients can expect to see a reduction in the number of SIPP providers they are in partnership with; due to them being bought out, merging together, or even going into administration.
Many SIPP providers have defended their due diligence processes. However, UK based IFA TailorMade Independent, who have advised on overseas investments with the Harlequin property, have launched an internal review of its processes after a scheduled visit from the FSA in January.
Whilst the new capital regime is coming under growing scrutiny, many providers do favour what the FSA is trying to achieve. It is inevitable that many advisers’ clients will be affected by the change and we can expect to see considerable changes to the SIPP market in the coming months.