Pension Mis-selling Explained
ARTICLE BY: RICHARD COULTHARD
Pension Mis-selling Explained
There have been lots of articles and stories in the news about pension ‘scams’ and pension mis-selling. The Financial Services Compensation Scheme recently announced that they have doubled their levy on regulated firms for pension and investment advice from £80m per year to £171m, due to the increase in SIPP related claims. The big questions for consumers are:
- What Is Pension Mis-selling?
- What is a SIPP?
- How do I know if I have been mis-sold a pension?
- What can I do if I have been scammed?
- Can I claim compensation?
- How long do I have to claim compensation?
These are not straightforward issues and expert advice is required, as strict time limits can apply. Matters are compounded by the fact that the terminology is not user-friendly for consumers.
What is Pension Mis-selling?
In its simplest form, pension mis-selling applies where an individual is advised to transfer from one scheme (‘the seeding scheme’) which was suitable for their needs and attitude to risk into another scheme which is not suitable or appropriate for the individual’s demands and needs.
In practice, the issue is far more complex and depends on a number of variables. As a starting point, I will deal with situations where a consumer has been advised by a ‘regulated’ advisor. A ‘regulated’ advisor is an advisor which is regulated by the Financial Conduct Authority (‘FCA’). It is a legal requirement that all financial advisors are regulated by the FCA where they are providing regulated activities. There are some financial activities which are not regulated, for instance advising on commercial finance. For the purpose of this article, pension transfers are regulated and therefore all advisers ought to have been regulated by the FCA.
In practice, however, there have been significant issues surrounding unregulated advisers providing financial advice and encouraging consumers to transfer their pensions. This is illegal, and, further, Section 27 Financial Services and Markets Act 2000 provides that any agreement introduced by an unregulated adviser is unenforceable. I will deal with this further below.
During a pension transfer, consumers are supposed to be presented with extensive information relating to a transfer including a full analysis of the benefits and risks of a transfer. An adviser ought to make enquiries regarding the consumers’ attitude to risk and the suitability of the product. These are requirements under the FCA Handbook, but were regularly overlooked by both regulated and unregulated advisers.
What is a SIPP?
A SIPP is a Self Invested Pension Plan. SIPPs were originally designed to be used by sophisticated investors who were experienced in investments and the risk associated with investments. The FCA has a clear definition as to what constitutes a ‘sophisticated investor’. SIPPs were not originally designed for ‘retail clients’ – essentially consumers. The reason for this is that SIPPs removed the usual barriers associated with traditional pension schemes which would restrict investments to relatively safe investments which were often based in England and Wales.
A SIPP would allow the customer to invest in whatever schemes they deemed to be appropriate, including, for instance, schemes based abroad which would not be protected by UK legislation or schemes.
For experienced investors, this could open up an attractive market where greater risk could mean greater reward. For a consumer client, however, this type of investment was totally unsuitable. An investor with large sums of money available to invest may be happy to invest a small proportion of his/her fortune (even if that proportion is a large sum of money) in a high risk investment, as the remainder of the portfolio is protected – but this cannot be said for a retail client.
Unfortunately, a practice occurred whereby certain SIPP providers and investments were paying very large commissions (sometimes tens of thousands of pounds) to both regulated and unregulated advisors to introduce clients into schemes. The only way to achieve this was to set up a SIPP, or in some cases a SSAS. Unfortunately, this led to a culture were unscrupulous, or naïve, advisers were actively advising customers to invest in SIPPs even where it was not suitable.
There is estimated to be 1.2m SIPPs in the UK and it is anticipated that a large proportion of these have been mis-sold.
How Do I Know If I have Been Mis-sold?
It can be difficult to tell if your pension has been mis-sold. Many SIPP providers continue to send annual statements which do not detail any loss of value in the pension.
An early warning sign is if you have been advised to transfer your pension into a SIPP or SSAS, and then going further you need to look at the time of asset you have invested in. A number of schemes have already failed, for instance Store First, AgroEnergy and Ethical Forestry are all failed investments and you may or may not have been notified about this.
Generally speaking, any investment in a foreign jurisdiction, in green energy or foreign property needs to be looked at carefully even if on the face of it the annual statement says that the investment has only lost a small margin. If your pension has seen little or no increase in value since the transfer, or if it has decreased in value, then you should seek expert advice.
What Can I Do If I Have Been Scammed?
You need to seek expert advice to ascertain the extent to which it is possible to recover any money you have lost. Beyond that, in some cases, it is necessary to report the matter to Action Fraud. There are a number of investigations ongoing at the moment in respect of pension scams.
Can I Claim Compensation?
This often depends on the circumstances. We can assist in advising on this.
If you were advised by a regulated adviser, then that advice will be protected by the Financial Services Compensation Scheme, which is a scheme of last resort but will allow for recovery of some or all of your losses.
If you were advised by an unregulated adviser, it may be possible to bring proceedings against the SIPP provider directly under Section 27 FSMA. There is already litigation ongoing against Berkeley Burke and Carey Pensions on this basis. The Trial of the claim against Careys was heard in March 2018 and Judgment is currently awaited.
If the adviser is still trading then it is likely that a claim can be presented against the adviser’s professional indemnity insurance, or a complaint could be made to the Financial Ombudsman Service. If you have invested in a SSAS, it may be more difficult to pursue a case and a careful analysis of who was involved in the transfer will be necessary.
How Long Do I Have To Claim Compensation?
This is not always a straightforward question. As a starting point, if the claim is presented within 6 years of the set up of the SIPP then your claim will be in time. Beyond that it is possible to bring a claim within 3 years of your date of knowledge that the pension had been mis-sold, and this is possible provided that this is not more than 15 years after the setup of the SIPP.
If you are concerned that you have been mis-sold your pension then please contact us for expert advice and assistance.
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