Portfolio letter for SIPP operators [pdf]

The Financial Conduct Authority (FCA) has published an open portfolio letter addressed at CEOs of Self-Invested Personal Pension (SIPP) account operators to summarize the key risks (of harm) the regulator has identified in connection with these firms and the market they operate in and to outline its supervisory focus and expectations regarding the mitigation of these risks. The portfolio letter follows a previous one issued in December 2020 which primarily addressed poor financial resources and resource management, poor complaints handling practices, and product governance deficiencies. Since then, so the FCA, firms have made much progress in improving their financial resilience and their operations with respect to before mentioned issues. However, some issues still remain which is why the FCA has issued this letter.
According to the FCA, the still observable risks primarily concern the following:
(1) Financial resources and firms‘ failures: In recent months, the FCA has observed an increase in firm failures, sometimes leading to some non-desirable consequences for investors such as the need to transfer their accounts (including their pension assets) and incurring additional fees. The FCA has also observed that some firms are not adequately modeling their liabilities or have used unrealistic assumptions when doing so in their assessment of liquidity needs. The FCA once again reminds SIPP operators that they are obliged to hold sufficient financial resources to meet their obligations. In this context, it is inevitable that they adequately monitor and calculate their liquid capital requirements and adjust their liquid positions accordingly. Also, firms are required to keep their wind-down plans up-to-date to ensure an orderly exit from the market, if so needed.
(2) (A lack of) due diligence: The FCA has also noticed that some customers invest in assets that they should not be investing in in their SIPP accounts. In this context, the FCA notes that it is the responsibility of SIPP operators to monitor account investments and to monitor those products introducers seek to have included in a pension scheme (according to the FCA, introducers are persons that advise and introduce prospective new clients as regards their investments). Additionally, particularly in view of the upcoming consumer duty, SIPP operators are also required to practice due diligence with respect to discretionary investment managers (DIMs) who may be managing some of the investments that a SIPP account holder is invested in. This also includes a review of the assets held in a particular portfolio by the manager to ensure that the assets are suitable for the SIPP account holder.
(3) Systems and data: In line with the observations described above, the FCA has also observed a lack of quality in the data maintained by SIPP operators. One key issue in this context was a lack of asset classifications as standard or non-standard assets which in turn allow operators to monitor the investments of SIPP account holders. Therefore, the FCA once again urges firms to consider the fitness of their systems and to make investments where ever necessary to ensure adequate due diligence and oversight. Furthermore, the FCA expects that data providers are scrutinized sufficiently to ensure that they can meet the data needs of the operators promptly, accurately, and in a reliable manner.
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To conclude, the FCA also talks about product governance and the new consumer duty. According to the regulator, SIPP operators will have to comply with a whole new set of obligations concerning product governance once the new consumer duty comes into force. This includes the assessment of the target market and a clear definition of those customers a SIPP product may not be suitable for. Additionally, SIPP operators will have to review their distribution chain which is even more so relevant in view of the ongoing fraud relating to SIPP accounts. Furthermore, SIPP operators will have to assess the adequacy of their fees in relation to the service they provide. This assessment must also be performed along the value chain (e.g. the fees of introducers or investment managers) to ensure that the customer gets a fair outcome.
As to its next steps the FCA notes that it will closely monitor SIPP operators and the implementation of the new consumer duty. When ever there are indicators or evidence of „failings“ relating to its expectations, it will take all steps necessary to resolve the issue.