The Financial Ombudsman Service (FOS) has ordered Independent Financial Advisory Ltd to compensate a client who was recommended to switch his stakeholder pension plan into a self invested personal pension (SIPP).
Mr M had a relatively small stakeholder pension pot of £37,000, and was advised by the firm to move it to a SIPP. His stakeholder contributions had been invested in an income fund and a gilt fund, and following the switch, his new SIPP was invested in a special situations fund and a global ‘absolute returns’ fund.
A key part of the FOS decision was their belief that the client’s investment objectives could have been met had he remained in the stakeholder plan. He was a cautious investor and the SIPP charges were higher than for the stakeholder plan.
Ombudsman Keith Taylor agreed with the decision of the original FOS adjudicator to uphold the complaint, by saying:
“The suitability letter says that Mr M’s objective was to have flexibility in investment choice and a more actively managed investment structure. But I think these aims could have been achieved within his existing stakeholder pension.
“I don’t think he is a sophisticated investor in the sense that he required access to unusual or esoteric investments that weren’t available within his existing stakeholder pension.”
Financial Conduct Authority guidance says that when considering pension switches, firms must always ask themselves ‘will the existing plan meet the client’s objectives?’ If the answer to this is Yes, then it becomes very difficult to justify a recommendation to switch.
Some claims management companies are becoming involved in the pensions advice arena, and are particularly active in pursuing claims on behalf of customers who were recommended SIPPs, when a regular personal pension may have been just as good, if not considerably cheaper.
Firms thus need to be confident that a SIPP is the best option for the client before recommending them. They must also note that they are responsible for ensuring that the underlying investments the SIPP contributions will be invested in are suitable.
Data from the Association of British Insurers shows a massive increase in recent years in the number of SIPPs being sold, although these figures relate to all sales of SIPPs and not just those sold through advisers. Only 150,319 SIPPs were effected in 2011, yet by 2015 this figure had risen to 1.7 million. With the advent of the pension freedoms, sales more than doubled in the space of 12 months, as 607,744 SIPPs were taken out in 2014.
Scott Gallacher, a financial adviser at Rowley Turton, commented:
“It has always been the case that clients come in thinking they need a SIPP, and in most cases they don’t. There has been a change in the market where SIPPs have become more mainstream.”
SIPPs are also responsible for much of the compensation being paid by the Financial Services Compensation Scheme to clients of failed advice firms.
The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article.