Financial Services Authority Self-Invested Personal Pensions (SIPP) operators A report on the findings of a thematic review September 2009
Contents 1 Introduction 3 2 Project findings and firms requirements 5 2.1 Overall project conclusions 5 2.2 Treating customers fairly 5 2.3 Relationships with firms that advise and introduce clients to SIPP operators 7 2.4 Conflicts of interest 8 2.5 Systems and controls 8 2.6 Disclosure of fees, charges and levies 9 2.7 Projections 10 2.8 Disclosure of the Open Market Option (OMO) 11 3 Next steps 13 The Financial Services Authority 2009
1 Introduction Why did we carry out this thematic review? The specific activity of administering Self-Invested Personal Pensions (SIPPs) has been regulated by the FSA, under the permission of establishing/operating/winding up a personal pension scheme, since 6 April 2007. In December 2008 we began a thematic review of small SIPP operators (firms supervised by the Small Firms & Contact Division holding this permission), to determine the extent to which they are adhering to our Principles and Rules. In December 2008 we contacted approximately 60 small SIPP operator firms, requiring them to complete and return a questionnaire covering a broad range of SIPP operator activities. Approximately 50% of the population were then selected for a telephone assessment, and some were subsequently visited. In this report, we describe the findings of this thematic review, and make clear what we expect of SIPP operator firms in the areas we reviewed. It also provides examples of good practices we found. We do not believe that, taken as a whole, small SIPP operators pose a significant threat to our statutory objectives. We were pleased to discover some very well run firms, and many examples of good practice. Nevertheless, the project uncovered a number of concerns on how firms conduct their business, which are discussed in this report. What we are asking firms to do now We are asking everyone receiving this report, including those who had a telephone assessment and/or a supervisory visit, to review their business in light of its contents. We may conduct further work in this area in future, and firms unable to demonstrate that they have analysed their systems and controls as a result of this thematic review, and made any appropriate improvements, may be the subject of a further regulatory investigation. Financial Services Authority 3
For illustrative purposes we have created case studies demonstrating good or poor practice. We are asking firms to review these and to compare what is described to their own practices. 4 Self-Invested Personal Pensions (SIPP) operators
Project findings and 2 firms requirements 2.1 Overall project conclusions Our findings can be briefly summarised as follows: We are particularly disappointed that some SIPP operators are behind where we would expect all regulated firms to be in the embedding of Treating Customers Fairly (TCF), demonstrated by way of management information. We are concerned by a relatively widespread misunderstanding among SIPP operators that they bear little or no responsibility for the quality of the SIPP business that they administer, because advice is the responsibility of other parties, for example Independent Financial Advisers (IFAs). In addition, we identified problems with firms systems and controls, including their Training and Competence regimes, as well as concerns over the accuracy and transparency of illustrations and the disclosure of charges. We have used and will continue to use our normal supervisory and enforcement tools, as appropriate, to address concerns identified by this project. This may be in the form of a feedback letter, remedial action or more formal action. 2.2 Treating customers fairly Our thematic review found firms that are behind where we expect them to be on the fair treatment of their customers. For example, firms had not taken adequate action to ensure that the operation of their SIPP was delivering fair outcomes, or could not demonstrate that their clients could be confident that they are dealing with a firm where the fair treatment of customers is central to its culture. We found that this has been due to: a misconception that TCF applies primarily to firms that give advice; a lack of understanding of how to apply the six TCF outcomes to SIPP administration; and Financial Services Authority 5
a lack of clarity over the management information the FSA expects SIPP operators to gather to measure the extent to which they treat their customers fairly. We are very clear that SIPP operators, regardless of whether they provide advice, are bound by Principle 6 of the Principles for Businesses ( a firm must pay due regard to the interests of its customers and treat them fairly ) insofar as they are obliged to ensure the fair treatment of their customers. COBS 3.2.3(2) states that a member of a pension scheme is a client for COBS purposes, and Customer in terms of Principle 6 includes clients. It is the responsibility of SIPP operators to continuously analyse the individual risks to themselves and their clients, with reference to the six TCF consumer outcomes. Firms should be monitoring, by way of management information, the quality, timeliness and accuracy of their activities and the extent to which they provide the service advertised to clients. Where SIPP operators do not provide financial advice, they should instead be collecting and analysing data measuring the quality and accuracy of the services and information they do provide. The following are examples of TCF activities that SIPP operators could consider, taken from examples of good practice that we observed and suggestions we have made to firms: devising formal administration and service standards for activities relevant to the firm, and recording the extent to which these are adhered to; recording and analysing the time taken and accuracy when processing important administration tasks, such as account reconciliations, investments transactions, pensions transfers (either into or out of the SIPP) and benefit crystallisation event calculations and implementations. having a robust Training and Competence scheme which includes Key Performance Indicators (KPIs) for all staff, individually prescribed to be relevant to their roles in contributing to the overall performance of the firm; linking KPI data (in particular that related to the delivery of positive customer outcomes) to the firm s remuneration and bonus structure; and an ongoing analysis of the firm s charges and pricing, and a comparison with the take-up of the corresponding services. It is also crucial that individual items of management information are cross-referenced and analysed in context, so that identified improvements are made. If information is linked together a firm can understand a full picture of its services, and allow it to demonstrate, with reference to objective data, gathered over a period of time, the extent to which its customers are treated fairly. 6 Self-Invested Personal Pensions (SIPP) operators
2.3 Relationships with firms that advise and introduce clients to SIPP operators We encountered a relatively widespread view among small SIPP operators that they bear little or no responsibility for the quality of the SIPP business that they administer, as this the responsibility of clients advisers. As a result, some SIPP operators have not been taking basic measures such as checking, on an ongoing basis, that advisers who introduce clients to them are FSA authorised and have the appropriate permissions. Some firms did not have formal terms of business agreements with advisory firms, and many do not gather and analyse management information tracking where their business comes from, together with indicators as to its suitability for clients. We agree that firms acting purely as SIPP operators are not responsible for the SIPP advice given by third parties such as IFAs. However, we are also clear that SIPP operators cannot absolve themselves of any responsibility, and we would expect them to have procedures and controls, and to be gathering and analysing management information, enabling them to identify possible instances of financial crime and consumer detriment such as unsuitable SIPPs. Such instances could then be addressed in an appropriate way, for example by contacting the members to confirm the position, or by contacting the firm giving advice and asking for clarification. Moreover, while they are not responsible for the advice, there is a reputational risk to SIPP operators that facilitate SIPPs that are unsuited or detrimental to clients. Of particular concern were firms whose systems and controls were weak and inadequate to the extent that they had not identified obvious potential instances of poor advice and/or potential financial crime. Depending on the facts and circumstances of individual cases, we may take enforcement action against SIPP operators who do not safeguard their customers interests in this respect, with reference to Principle 3 of the Principles for Businesses ( a firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems ). The following are examples of measures that SIPP operators could consider, taken from examples of good practice that we observed and suggestions we have made to firms: Confirming, both initially and on an ongoing basis, that intermediaries that advise clients are authorised and regulated by the FSA, that they have the appropriate permissions to give the advice they are providing to the firm s clients, and that they do not appear on the FSA website listing warning notices. Having Terms of Business agreements governing relationships, and clarifying respective responsibilities, with intermediaries introducing SIPP business. Routinely recording and reviewing the type (i.e. the nature of the SIPP investment) and size of investments recommended by intermediaries that give advice and introduce clients to the firm, so that potentially unsuitable SIPPs can be identified. Financial Services Authority 7
Being able to identify anomalous investments, e.g. unusually small or large transactions or more esoteric investments such as unquoted shares, together with the intermediary that introduced the business. This would enable the firm to seek appropriate clarification, e.g. from the client or their adviser, if it is concerned about the suitability of what was recommended. Requesting copies of the suitability reports provided to clients by the intermediary giving advice. While SIPP operators are not responsible for advice, having this information would enhance the firm s understanding of its clients, making the facilitation of unsuitable SIPPs less likely. Routinely identifying instances of execution-only clients who have signed disclaimers taking responsibility for their investment decisions, and gathering and analysing data regarding the aggregate volume of such business. Identifying instances of clients waiving their cancellation rights, and the reasons for this. 2.4 Conflicts of interest A minority of the firms in the small SIPP operator population have permissions to give advice on SIPPs as well as to administer them. This creates an immediate potential conflict of interest, if a whole of market adviser recommends the SIPP operated by the same (or connected) firm, because they are obligated to demonstrate that it was the most suitable for the client having researched alternative providers. We believe it is very important that the firm s role and parameters, when acting in a purely administrative rather than an advisory capacity, should be clearly defined at all times. At the very least, we expect firms in this position to fully and prominently disclose the potential to conflict to their clients, and to comply with all the normal COBS suitability requirements. The most effective means of resolving the conflict that we observed was the firm only recommending its own SIPP when the independent research tools it ordinarily uses identified it as the most appropriate SIPP for that client. 2.5 Systems & controls A common observation regarding small SIPP operators who we judged unable to demonstrate that their clients were being treated fairly was poor systems and controls. For example, we observed a lack of procedures, internal or external file reviews, peer-checking, senior management sign-off and use of checklists or proforma relating to the following important aspects of SIPP administration: reconciliations of SIPP member bank accounts with the firm s SIPP provider; benefit crystallisation event calculations; annual valuation of members assets; 8 Self-Invested Personal Pensions (SIPP) operators
retaining proof of title of clients investments; retaining evidence of client instructions for investments and movement of funds; identity verification for anti-money laundering; and business continuity procedures. We believe it is very important that SIPP operators have robust procedures for carrying out these and other important functions. Firms should also consider how the implementation and effectiveness of their procedures are monitored, e.g. using internal or external audit facilities or compliance consultants. In general, firms were able to demonstrate good safeguards to prevent investments, inadvertent or otherwise, into taxable property (those investments that might attract unauthorised payment tax charges by HMRC), and effective procedures for providing the appropriate regular returns to HMRC. 2.6 Disclosure of fees, charges and levies We observed variable quality in the disclosure and confirmation of charges by firms, in particular on time-cost charges, which in some cases was opaque. For example, some firms provided an hourly rate but did not indicate what the final cost was likely to be. We observed instances of firms retaining a proportion of interest payable to members on their SIPP bank accounts. We believe it important that SIPP operators disclose the rate of interest earned on cash accounts with equal prominence to other charges information. COBS 13.3.2R requires operators to include in Key Features Documents any other information necessary to enable a retail client to make an informed decision. We consider that, given the potential importance of cash accounts, prospective members are likely to need to know the account s interest rate, or the method used to set the interest rate, in order to make an informed decision. SIPP operators will wish to consider the comprehensiveness and transparency of the information they give to members and prospective members, and whether they are likely to be interested in the fact and the amount of interest retained. Disclosure of this information will help enable firms to meet TCF outcomes 1, 3 and 5. SIPP operators should also be aware that our Client Assets Sourcebook (CASS) prevents firms from retaining interest earned from members deposits if they do not notify a retail client in writing whether or not interest is to be paid on client money and, if so, on what terms and at what frequency. We would remind firms that depending on their individual activities and the fees and charges they levy, the provisions of COBS 2 apply. In particular, we would draw to firms attention COBS 2.2.1R (a) and (d), which require them to provide information about their firm and its services, and all its costs and associated charges, in a comprehensible form to a client. Financial Services Authority 9
We also observed firms receiving a commission calculated with reference to the total amount held on deposit by the provider in respect of the firm s SIPP members. In some cases these commissions were not disclosed, and in others, although they were disclosed, this was not done prominently, alongside the disclosure of charges. SIPP operators receiving commission from third parties must comply with the inducement rules in COBS 2.3.1R. These rules oblige a firm to ensure that any fees or commissions do not impair its duty to act in the best interests of the client. Where fees or commissions are disclosed it must be in a comprehensive, accurate and understandable way. SIPP operators receiving commission or fees need to consider whether these payments can be accepted under COBS 2.3.1R. We also believe it is good practice for firms to have mechanisms to routinely and periodically review, benchmark and revise their charges. 2.7 Projections As with the disclosure of charges, we saw considerable differences in the quality of information produced by firms. In the first instance we wish to clarify that SIPP operators are not obliged to produce projections for their members, apart from an annual Statutory Money Purchase Illustration (SMPI), for contracting-out and for uncrystallised benefits and pre-crystallisation illustrations for clients considering unsecured or alternatively secured pension. However, providing projections at the point of joining is, in some circumstances good practice and will deliver a better outcome for consumers. For instance, if the SIPP is predominantly invested in packaged products then a projection will give a realistic view about the possible retirement benefits. However, firms that produce projections must comply with our rules, in particular the provisions of COBS 13.4, and COBS 13 Annexes 2 and Annexes 3 which cover the requirements of key features projections. Annex 2 states that projections must reflect all of the charges, expenses and deductions a client will, or may be expected, to pay. We saw instances of projections being produced whereby charges, levied by the SIPP operator, the client s adviser and/or the investment provider, were not accurately reflected. We are clear that where SIPP operators produce projections, they should account for the fees and charges the firm itself, as well as any other parties to the provision of the service, such as an adviser, will be taking. With regard to also accounting for expected asset charges on the underlying investments, we appreciate that it is the investor who decides the assets to be held within the SIPP and it is difficult for SIPP operators to account for all the potential charges of various assets held. Nevertheless, it is difficult to envisage how meaningful projections of any kind can be produced, including those required SMPIs, contracting out and for drawdown if the expected underlying asset charges are not reflected. We therefore expect firms to consider how they could produce projections which reflect estimated underlying 10 Self-Invested Personal Pensions (SIPP) operators
asset charges, where it is reasonable to do so. Doing so will generate a more realistic estimation of future retirement benefits, which would assist firms in achieving TCF outcome 3 ( Consumers are provided with clear information and are kept appropriately informed before, during and after the point of sale ). We also saw instances of inappropriate investment growth rates being used, e.g. 5%, 7% and 9%, in relation to underlying investments unlikely to produce such returns. It is very important that firms consider the nature of the underlying assets in which SIPPs are invested, and produce projections which use realistic growth rates. For example, money held in a cash account will be expected to generate lower growth rates. Firms are not bound by the FSA standardised maximum deterministic projection rates, currently 5%, 7% and 9% for pensions. COBS 13 Annex 2 2.4R(1) confirms that projections must be calculated using lower rates of return, if the standardised rates overstate the investment potential of the product. We observed instances of firms in breach of the Department of Work and Pensions (DWP) requirement to issue a Statutory Money Purchase Illustration (SMPI) at least once per year (to clients who have not yet crystallised benefits). We understand that The Occupational and Personal Pension Schemes (Disclosure of Information) Amendment Regulations 2002 (SI 2002/1383) require that from 6 April 2003 all members of personal pensions (and other money purchase pension schemes) must be sent an illustration annually of the amount of future pension that might become payable under the scheme in real terms. On their own the regulations do not provide full details of what is required on the SMPIs. The Technical Memorandum TM1: Statutory Money Purchase Illustrations (Version 1.3) issued by the Board for Actuarial Standards covers this. 2.8 Disclosure of the Open Market Option (OMO) We reviewed samples of standard so-called wake up and reminder OMO letters from the firms in the initial project population and measured them against the technical requirements of COBS 19.4 and more general TCF requirements. There were differences in the quality of the literature which we reviewed. While adherence to the requirement to mention the existence of the OMO was good, there were wide variances in whether it was mentioned with sufficient prominence or in a positive manner, so that the consumer would actively consider taking pension by way of an annuity as opposed to income drawdown. We are therefore asking firms to review the benefit crystallisation literature that they provide to members, to ensure that the provisions of COBS 19.4 are being met. We would clarify that there is nothing in COBS 19.4 that requires a SIPP operator to provide an illustration of the possible annuity when issuing the OMO literature. However, SIPP operators must quote the fund value and inform members that there are various at-retirement benefit crystallisation options, including annuities and drawdown. Firms can, if they want, steer customers towards our annuity Comparative Tables. Financial Services Authority 11
Another good reference point is the Association of British Insurers (ABI) July 2008 Good Practice Guide, Improving Customers Retirement Experiences, available on the ABI website, which can be tailored to firms individual circumstances. We also remind firms that when they do issue an illustration for unsecured or alternatively secured pensions, they must include the appropriate annuity figures, as required by COBS 13 Annex 2 (paragraph 2.9). A projection for an unsecured or alternatively secured pension must be based on an assumption that the current gilt-index yield will continue to apply throughout the relevant term, and include (among other things) the maximum initial income specified in the tables published by the Government Actuaries Department. 12 Self-Invested Personal Pensions (SIPP) operators
3 Next steps As noted above, we now expect every firm receiving this document to review their business in light of its contents, and they should be able to demonstrate that they have done so. We believe our ongoing monitoring of firms has proved effective at identifying those individual firms that may pose a risk, and we believe we should continue to monitor the population in this way. Nevertheless, we may conduct further work in this area in future. Firms unable to demonstrate that they have analysed their systems and controls as a result of this thematic review, and made any appropriate improvements, may be the subject of a further regulatory investigation. Financial Services Authority 13
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