SIPPs – the next big mis-selling scandal?

Experts are predicting that SIPPs – Self Invested Personal Pensions – are set to become the next big mis-selling scandal in the UK.

An investigation team from the Money team at the Sunday Times says pension firms are facing claims for millions of pounds from thousands of consumers who invested in high risk schemes and lost their money.

More than doubled

Claims lodged with the Financial Ombudsman Service (FOS) have more than doubled in four years and decisions have been found in favour of the complainants in around two thirds of the cases decided so far.

Journalist Ali Hussain said: “Many investors ploughed money into unregulated schemes, such as tree plantations in Cambodia, agricultural developments in Costa Rica and burial plots in Birmingham.

Some SIPPs allowed investments in self-storage units managed by Store First Limited, a company investigated by the Serious Fraud Office.”

£50 million

One solicitors’ practice alone – APJ Solicitors – is dealing with more than 1,400 complaints involving investments worth more than £50 million.

Mr Hussain quotes an example of a Cheshire car factory manager who invested £22,000 in plantations in Costa Rica on the advice of an unregulated financial advisor who called him offering a free pension review.

Both the advisor – Liberty SIPP – and the Costa Rican scheme went bust. Asked about the circumstances the investor said: “We did not receive any warning that our investment was at risk.”

Floodgates

A landmark judicial review in October 2018 appears to have opened the floodgates for claims after the High Court ruled that it is the responsibility of the SIPP advisor to practice due diligence and ensure the schemes to be invested in are sound.

It stemmed from a long running dispute between provider Berkley Burke and FOS over the duty of care in vetting unregulated investments for clients.

Types of investment

FOS has revealed the top five ‘alternative’ investments they have received complaints about in the last year:

  • Truffle trees – where funds were used to buy a number of trees whose roots are sprayed with a chemical to encourage the growth of truffles between the tree roots.
  • Sunken treasure – shares are bought in a business that traces sunken shipwrecks in the hope of recovering treasure.
  • Cambodian bio-fuels – plots of land in Cambodia were bought so that Jatropha trees could be grown to produce bio-fuels.
  • Burial plots – purchasing burial plots, with a promised return on investment when the plot is later sold.
  • Whiskey – an investment in maturing and appreciating whiskey, with a promised return on investment when the whiskey is later sold.

Total liability

The service said there are currently 500 claims outstanding against Berkley Burke because the firm was considering an appeal of the judicial review decision. Possible compensation could be as high as £22 million.

Founder and chairman Grahame Berkley said: “At stake is not simply the conduct of our business but the entire SIPP industry, including the multibillion-pound platform industry.

“The entire SIPP industry, platform providers included, is wondering who will be next in line for a claim brought by someone unhappy about the outcome of an investment that may have been made 10, 20, 30 years ago or more.”

Probe

Now the Financial Conduct Authority (FCA) has launched a probe into how SIPPs operate.

The regulator has written to all chief executives asking them for information about their business activities and their expectation of the way the providers handle their due diligence obligations when accepting investments.

A spokesman from the FCA said: “We responded swiftly to the court’s decision in the judicial review because we wanted to make sure that consumers had confidence in this sector, knowing that the firms competing for business are committed to treating their customers fairly.”

Huge implications

Said Mr Hussain: “The case has huge implications for SIPP firms, which hold retirement funds of about £300bn and allow savers to invest in a wide range of products, including high-risk, unregulated schemes.

“Investors blame unscrupulous or incompetent financial advisers for convincing them to invest in unregulated schemes that went wrong.

“When schemes fail, advisers can simply close their business to avoid paying compensation, leaving investors to seek redress from the Financial Services Compensation Scheme, the government lifeboat, which awards a maximum £50,000, typically a fraction of the amount many lose.”