Growing importance of SIPP due diligence

1 June 2022

The reputation of the SIPPs market has taken a knock in recent years, which serves to highlight the need for paraplanners to conduct effective due diligence on any company they intend to use, says Stephen McPhillips, technical sales director, Dentons Pension Management Limited.

Paraplanners will be very familiar with the need for careful due diligence, as it forms a key part of their day to day roles. Indeed, outside of the financial services world, we all carry out analysis of some kind before making a purchase – be it researching a holiday destination, assessing the features of a new mobile phone and so on. When it comes to SIPP providers, however, things may not be quite as straightforward as we might like them to be when it comes to due diligence.

It’s an unfortunate fact that SIPPs (and some providers of these) have not enjoyed the best of reputations in recent years. There have been some relatively high profile court cases and SIPP provider failures that have afflicted the sector. In addition to this, there have been knock-on effects for the wider industry in the form of Financial Ombudsman Service (FOS) determinations and claims on the Financial Services Compensation Scheme (FSCS), the latter of which has directly impacted on levies for financial advice firms. Even if an advice firm does not get involved in establishing SIPPs for clients (although most would), their existence cannot be ignored. Of course, the perennial question of “what is a SIPP?” rears its head at this juncture.

Accepting the fact that most, if not all, advice firms will have clients with SIPPs in some shape or form, the question of SIPP provider due diligence then comes to the fore – both in terms of reviewing providers existing clients are exposed to, and perhaps researching the market for a different / new provider.

What due diligence considerations might there be?

The following is not intended to be an exhaustive list of considerations that might apply, but hopefully it will be of some assistance to paraplanners, particularly where the client’s investment needs extend beyond a limited range of life company / platform funds:

  •  Is the provider capable / competent?
    • is it experienced in handling complex investments?
    • does it offer local business development support?
    • is it willing to conduct necessary due diligence on investments?
    • will it do so fee-free?
  • What is the provider’s capital adequacy position i.e. does it meet or exceed the requirements of the Financial Conduct Authority’s “cap-ad” rules for SIPP providers?
  • Does its permitted assets list allow the client’s desired investment?
    • and does it outline unacceptable assets?
  • Does the provider have a robust investment due diligence process of its own to follow?
    • does it have specific investment questionnaires for a range of investments?
    • does it operate an investment committee to review non-standard investments?
    • does it retain the services of external due diligence specialist to supplement its own research?
  • Does the provider have a track record of profitability and a strong financial position?
  • Does the provider have exposure to a significant number of distressed / non-standard assets?
  • Does the provider have a number of FOS complaints / FSCS claims – historic and / or ongoing against it?
  • Has the provider historically accepted volume business from unregulated introducers?

These are just some of the aspects that paraplanners may wish to consider when reviewing and / or selecting a provider. Sadly, some of these aspects are ones that have led to a number of provider failures in the past few years.

How might clients be affected by a provider failure?

The failure of a SIPP provider is an unfortunate event. In the short term, there might be no noticeable impact on clients. However, as time goes by, the impacts may become far more noticeable. There are various ways in which a provider’s failure might be dealt with, but history has often shown that the failed provider’s book is taken on by another provider, with the new provider’s staff dealing with the failed provider’s former clients. This can lead to poor service levels, poor understanding of the client’s requirements, prolonged delays in obtaining information, administration errors and a change of charging structure – none of which the adviser firm had recommended initially and none of which the client wanted to experience. If a decision is made to try to move the client away from a failed provider (or from its acquirer), that in itself can be beset by delays.

Ultimately, great care needs to be taken with the selection of a SIPP provider for clients and sound due diligence is key. Strangely, it is the very fact that we have witnessed a number of provider failures that should make that due diligence work a little easier; there has been a clear direction of travel that a number of providers have taken in the past and it should be possible to identify any that still exist – and to take action before it’s too late.

Professional Paraplanner