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SIPP & SSAS Ombudsman complaints round-up - Spring edition

We highlight below some recent complaints that have come before the Ombudsmen.

If you are a SIPP or SSAS provider or financial advisor, read more to find out how the Ombudsmen approach certain complaints and how best to apply those outcomes to your own business.

The approach of the ombudsmen during the covid-19 pandemic

The Pensions Ombudsman and the Financial Ombudsman Service (FOS) have issued statements on the approaches they are taking to complaints in the current circumstances.

The FOS has stated that businesses should be fair in their assessment and handling of complaints involving coronavirus, and follow guidelines and advice from the relevant government and regulatory bodies.  In deciding whether a firm has acted fairly, the FOS will take into account the FCA’s reminder to firms to treat customers fairly and about the information they can provide to their customers to help them make the right decisions at this time about their investments without inadvertently providing regulated advice.

The Pensions Ombudsman is only accepting online applications and email enquiries and cannot accept post in the current circumstances.  The Ombudsman has said that, wherever possible, it will use its discretion to expand the time limit of three years for new applicants affected by its period of restricted service.  It has also confirmed that it will take account of the latest guidance from The Pensions Regulator to allow for possible effects that the current situation is having on its stakeholders and customers.

We have not yet seen the impact of coronavirus on the number and types of complaints coming before the Ombudsmen.  Clearly, it is likely to have a significant impact on both Ombudsmen in the near future.  The chief ombudsman at the FOS has already stated her view that COVID‑19 will further amplify both the uncertainty and potential complexity of its casework.  We anticipate that we will start to see coronavirus-related decisions being published by the Ombudsmen in the next few months.

Ombudsman’s reminder of ‘good industry practice’ in relation to investment instructions

Ms D complained that her SIPP provider failed to protect her from investment loss in relation to an investment in a property development scheme in Cyprus in 2008.  As part of the transaction, the SIPP provider (the Provider) transferred money from Ms D’s SIPP to her IFA’s lawyer in Cyprus, Mr C, believing this was part of the transaction.  Ms D complained that the Provider had transferred money to Mr C without understanding what it was paying for or obtaining for Ms D in return for the money.

The Ombudsman upheld the complaint, finding that the Provider had not acted fairly and reasonably in making the investment.  The Provider was under an obligation to identify and protect against potential consumer detriment, but had not done so in this case because there was no clear and finalised structure for the investment at the time the payment was made.  It was not known how the land was to be acquired and developed and consequently the security of the investment was unclear.

The Ombudsman pointed to reports, letters and guidance from the FCA on how SIPP providers may achieve the outcomes envisaged by the Principles for Businesses.  In his view, these set out the standards expected of SIPP operators at the time of events in this complaint and it was “good industry practice” to check matters affecting title and HMRC compliance of an investment before paying out any money on behalf of a member.  The Ombudsman concluded that although some of the materials were issued after the events subject to the complaint, the regulations and Principles that underpin them existed throughout.

The Provider could have declined the investment instructions if it suspected consumer detriment – the Ombudsman noted that doing so does not amount to providing advice on the investment. 

The Ombudsman held that the COBS rules and the Principles requiring customers to be treated fairly meant that it was not fair and reasonable for the Provider as a regulated firm to seek to rely on an exclusion of liability clause in the trust deed to avoid liability for its errors.

The Provider was directed to compensate Ms D for her loss in order to, broadly, put her in the position she would have been in had it acted appropriately.

What does this mean for you?

  • SIPP operators must take steps to identify whether instructions could amount to consumer detriment and decline them if they suspect detriment - a common theme in recent FOS decisions.
  • The duty to protect against consumer detriment applies regardless of whether an operator is advising clients.
  • An exclusion of liability clause may not provide protection if the Ombudsman considers that it is not fair and reasonable to rely on it.

Bank of England base rate not appropriate redress for investment loss

Following a recommendation from investment advisers, Mr N and four other persons set up a SSAS and transferred in their existing pension funds in order to purchase a commercial property.  A share of the pooled cash held in the SSAS, comprising the balance of each member’s transfer value over and above the property purchase price, a share of future rental income and any contributions, was to be earmarked for each member and allocated to their own individual accounts.  However, the complexity of the property share allocations meant that the earmarking did not take place and the cash was not invested.

Mr N complained that the non-investment of the cash fund resulted in him suffering a loss of the potential returns over this period. The SSAS’s investment adviser denied responsibility for the losses, claiming that it could not advise on potential investments until the earmarking had taken place.

The Pensions Ombudsman noted that the member trustees and their advisers, not SSAS providers, have the duty to invest the pooled assets. The delays in earmarking had not prevented the member trustees from investing; the investment adviser could have recommended a pooled or notionally earmarked investment portfolio.  The Ombudsman concluded that the investment adviser knew the funds had not been invested but took no steps to rectify this. He therefore determined that the investment adviser should compensate Mr N for his loss.

Historically the Ombudsman has used the Bank of England base rate to calculate investment loss where it is not certain what financial position the applicant ought to have been in had the investment been made.  However, as the base rate has been lower than inflation from some considerable time, the Ombudsman was not satisfied that this was appropriate redress for Mr N’s losses.  He also considered that it failed to reflect that Mr N had paid for financial advice in order to invest in something other than cash.  The Ombudsman directed compensation to be calculated using the investment return that would have been achieved had Mr N’s cash been invested in line with the adviser’s model portfolio, rather than the base rate or another notional rate.  The Ombudsman was satisfied that such a calculation could be undertaken with a reasonable degree of confidence in this case.

What does this mean for you?

  • The SSAS trust deed and rules is relevant in determining who has the duty to make investments, in what circumstances and who is liable in cases of non-investment.
  • The pooled fund approach of a SSAS provides flexibility, however it is important that earmarking is correct and documented from the outset in order to mitigate the risk of claims.
  • Note the Pensions Ombudsman’s revised approach to calculating investment loss over periods where the base interest rate has been lower than inflation - this may be followed in future cases, resulting in higher awards.

SIPP documents put adviser on notice that investment instructions required

There was a compulsory redemption of funds in which Mr N’s SIPP was invested.  Mr N had the option to reinvest automatically the redemption proceeds into a new fund (New Fund) or to have them paid into the SIPP as cash.  Mr N wished to reinvest in the New Fund but did not submit his application before the deadline.  The New Fund confirmed, however, that Mr N could still invest on favourable terms once the redemption proceeds had been paid into the SIPP in cash.

In the meantime, a new provider took over as operator, trustee and administrator of the SIPP (New Provider).  It received the redemption proceeds into the SIPP in four separate transactions over 18 months.  The proceeds were not reinvested in the New Fund and remained in the SIPP as cash. 

Mr N’s IFA asked the New Provider to investigate why the proceeds had not been reinvested, as requested in emails that the IFA sent to the previous SIPP provider (Old Provider).  The New Provider explained that it had received no instructions to invest in the New Fund and that the Old Provider did not pass on any investment instructions.  Mr N complained that the New Provider failed to reinvest the redemption proceeds into the New Fund in accordance with instructions given to the Old Provider by his IFA and he suffered financial loss as a result.

The Deputy Pensions Ombudsman determined that the New Provider had not caused any loss that Mr N suffered.  The SIPP’s terms and conditions clearly stated that the New Provider would only act on instructions from Mr N or his IFA.  Mr N and his IFA had been informed that there had been no investment and the SIPP valuations issued by the New Provider to the IFA showed that this was the case.  The Ombudsman concluded that they were on notice that instructions were needed, however they failed to take any action to rectify this or invest the funds.

The Ombudsman also found that Mr N later decided on his own accord that he did not want to reinvest, despite being invited by the New Provider to do so.  The Ombudsman therefore decided that the New Provider was not liable for any financial losses suffered by Mr N.

What does this mean for you? 

  • SIPP operators should ensure that terms and conditions are clear when acting execution only to prevent liability in cases where members (or their IFAs) do not give investment instructions.
  • Where SIPP books are acquired, operators are reminded of the importance of reviewing any SIPPs with uninvested cash funds, to mitigate the risk of potential claims of maladministration.

A reminder that terms and conditions are key when acting ‘execution only’

Mr S wished to replicate in a SIPP the investments that he had previously used for his ISA.  His adviser sourced and applied for a SIPP that could accommodate his request.  The SIPP provider accepted the application and sent the adviser a welcome letter.  This stated that it was the adviser’s responsibility to make investments and that the provider was not able to make any investments on the adviser’s behalf.

Two years later, Mr S discovered that the monies transferred to his SIPP had not been invested as he wished and had been held in cash.  He complained to his adviser that they had failed to follow instructions and sought compensation for lost investment growth.  The adviser stated that it was a matter for the SIPP provider.  Mr S was not satisfied with this response and brought a complaint to FOS.

The Ombudsman concluded that although the provider’s response to the application for the new SIPP could have been more explicit, the provider’s terms and conditions made it clear that the provider would not make any investments on the customer’s behalf and that the adviser would take responsibility for this.  The Ombudsman held that the adviser was under a responsibility to check that investments had been made and was at fault for the money not being invested.  Therefore the adviser should compensate Mr S for any losses suffered from the lack of investment. 

The adviser was directed to compare the performance of Mr S's SIPP funds with the notional performance had they been invested in the chosen funds over the relevant time period and, if there had been loss, to pay the amount into Mr S’s pension plan to increase its value by the total amount of the compensation.

What does this mean for you?

  • The FOS and the Pensions Ombudsman are aligned with their approaches here (see our comments on the Pensions Ombudsman decisions above).
  • We recommend that a SIPP operator’s ‘welcome letter’ is expressly worded to flag relevant terms and conditions relating to its execution only role.
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at May 2020. Specific advice should be sought for specific cases. For more information see our terms and conditions.

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