Have You Been Miss-Sold A Toxic SIPP Investment?

SIPPs, or Self-Invested Personal Pensions to give the tax efficient ‘wrapper’ its full title, are a great way for experienced investors to gain more control over their long term investments. The wrappers, which offer an income tax rebate on funds set aside for a private pension pot, as well as protecting any returns from the tax man, are popular in the UK. One of their strengths is that unlike ISAs, which only a limited range of FCA-regulated investment classes can be held within, SIPPs offer far more personal autonomy.

The flexibility offered by SIPPs is undoubtedly a plus but can also be a double-edged sword, encouraging investors into riskier vehicles. Gold bullion, mini bonds and commercial property can be held within a SIPP. Alternative investments such as art, classic cars and vintage wine can also be covered, though additional taxes will be applied so they are not fully protected by the wrapper. SIPP providers will also usually charge considerably more in management fees for SIPPs that include more exotic investments and usually only speciality providers cater to them.

Unregulated investment schemes that are only suited to sophisticated and high net worth individuals are also often marketed as SIPP compliant. However, to be marketed as SIPP compliant, an FCA-regulated SIPP provider must have agreed to accept these investments into their SIPP offering. Before doing so they have a responsibility to conduct due diligence on the firm marketing these investments as well as the management behind them.

That doesn’t mean that they don’t involve a high level of risk. But a SIPP provider should not admit an investment vehicle that the FCA would be expected to deem particularly high risk or speculative. The risk profile should also be transparently explained to potential investors before they have committed. The finances, management and business plan behind the investment scheme must be assessed as meeting basic requirements of protecting the interest of investors and standing a reasonable chance of successfully delivering returns.

It appears that not all FCA-regulated SIPP providers performed that due diligence appropriately or failed to reject speculative investment schemes on the basis their risk profile was not suitable. A Sunday Times investigation this weekend highlights how a large number of ‘toxic’ SIPP investments where marketers and managers have gone bankrupt have been sold to retail investors they were not a suitable risk profile for.

A landmark case last October ruled against SIPP company Berkeley Burke for not carrying out sufficient due diligence on one scheme that went bust. The investment was structured around financing developing agricultural land in Cambodia. The ombudsman found that Berkeley Burke “had failed in its duty of care by permitting the risky scheme in its SIPP”.

Having contested the ombudsman’s ruling through the High Court and then a judicial review, Berkeley Burke has failed to win a reprieve. A decision on whether the company will have the right to a further appeal will be made within the next few weeks. The expectation is that it won’t.

If that does turn out to be the case, the Berkeley Burke case could open the floodgates for the next big ‘miss-selling’ scandal. Thousands of investors have lost tens, occasionally hundreds, of thousands of pounds investing in unregulated collective investment schemes structured in a similar way to the Cambodian land redevelopment scheme in question.

In the years following the financial crisis, with investors chasing returns, a plethora of unregulated investment schemes were marketed across the UK. Cold calling was a major marketing channel, with companies taking advantage of the pre-GDPR environment. Anyone who had ever filled out an online form connected to an unregulated investment product, and even some that were, stood a high chance of finding their way onto a list of phone numbers of prospective investors. Those were almost always resold by the companies that originally collected the data, often many times over.

Airport or city centre parking spaces, storage facilities, hotel rooms, agricultural land, biofuels, renewable energy installations, forestry, carbon credits and rare earth metals are just some of the alternative commodities packaged up as investment schemes similar to that of the Cambodian land in the Berkeley Burke case. The projects are often based abroad in the developing world. Thousands of British investors are thought to have been convinced to buy into them through SIPPs and most have lost money. Many the entirety of their original investment.

However, should the Berkeley Burke case move to the now seemingly inevitable conclusion that the company’s final appeal is rejected, it could open up the floodgates for thousands of similar claims against it and other SIPP providers. There are currently a total of 176 claims being made against Berkeley Burke, with the investors jointly represented, according to the Sunday Times investigation, by law firms Hugh James and Wixted. APJ Solicitors, the company representing the original claimant in the landmark case, is representing another 66 claimants.

The ombudsman says that there are a total of 500 claims lodged against Berkeley Burke to date, which add up to a total liability in the region of £35 million with £3 million already spent on fees in the attempt to contest the original 2014 ruling. Grahame Berkeley, the company’s founder and chairman argues that his company has been proven to have fully explained the risks to the investor, fulfilling its duties as an FCA-regulated entity. Beyond that it had no commercial relationship with either the marketer or management of the Cambodian land investment scheme, or any other, and simply facilitated its inclusion within a SIPP wrapper. To do so Berkeley Burke charges an initial £250 fee and 1% of the value of investments held as an annual administration fee.

He believes a final ruling against his company will only serve to reduce the choice available to UK pensions investors as SIPP providers will start to take a strict conservative position on the investments they allow:

“The ultimate losers will be the country’s consumers and savers, who will simply have less choice over where and how to invest their money.”

However, the counter argument is voiced by Tim Shepperd, a policy specialist at the Single Financial Guidance Body, which falls under the Department for Work and Pensions. He is quoted as confirming that SIPP providers do have a responsibility of “duty to ensure that the investment is suitable for a pension arrangement”.

The question now becomes how big the toxic SIPP investments scandal and fallout might become. SIPP providers stand accused of being happy to pocket fees in exchange for absolving themselves of responsibility for the inevitable losses that investors in ‘racy’ exotic schemes faced. Their argument that they simply provided an administrative service with no advisory role stands against the counter-argument that placing these investments within the legitimising context of an FCA regulated pensions wrapper lulled investors into a false sense of security.

The case again raises the tricky nature of finding the right balance between ‘nanny state vs. personal responsibility and freedom to take individual financial decisions’. Were retail investors in unregulated investment schemes too naïve to fully accept the level of risk they are taking on? Or are they simply greedy, chasing the kind of high returns that inevitably come with heightened risk and now deflecting responsibility? Are SIPP providers, several of whom may go out of business if there is a snowball effect in claims, the victims here too?

There will be arguments on both sides and the ‘truth’ is probably a shade of grey. What the situation should be is a lesson to both sides to take more responsibility. We should all know that it is a salesperson’s job to sell us something and our responsibility to, if we choose to listen to the pitch, then read between the lines for the downsides. And the reality is that many of those employed largely on commission to flog risky investments are not qualified to themselves to fully appreciate the dangers inherent in what they are selling. They might be just as convinced by the ‘brochure’ as their subsequent clients.

Yes, there probably does need to be tighter controls on companies marketing these schemes and GDPR has meant doing so is now far more difficult. And perhaps FCA-regulated SIPP companies should have been more discerning in the kind of investments they allowed into the wrappers they administrate. But investors should also heed the lesson and appreciate that if returns offered through unregulated investments are hugely attractive, that inevitably comes with a high risk ticket. There’s no such thing as a free lunch. Something Berkeley Burke also failed to appreciate.