FSCS allocation of claims regarding IFAs and SIPP operators
9 Mar 2020 11:25 AM
When customers suffer losses as a result of failed investments made via a SIPP there are often a number of different firms which may be liable for some or all of those losses.
When customers suffer losses as a result of failed investments made via a Self-invested Personal Pension scheme (a “SIPP”) there are often a number of different firms which may be liable for some or all of those losses. The regulated firms which FSCS usually receives claims for compensation in relation to are:
- Customers’ Independent Financial Advisers (“IFAs”); and
- The operator/provider of customers’ SIPP schemes (“SIPP Operators”).
The losses which each firm will be responsible for will depend on the nature of the advice or service performed by the firm, and customers may have claims against both, or either, of the IFA and the SIPP Operator.
Under the rules governing how FSCS operates (the “COMP Rules”), the compensation FSCS may pay in respect of investment losses is currently £85,000 per protected claim, per firm. This means that customers who have suffered losses of more than £85,000 may be left with uncompensated losses.
Customers may, however, be entitled to further compensation from FSCS against another firm (e.g. a SIPP Operator) if another protected claim exists. in the same way that they would be entitled to bring proceedings against both an IFA and a SIPP Operator in the civil courts.
Allocation of claims
Where a customer receives advice from a regulated IFA to transfer their pension into a SIPP and invest their pension savings in unsuitable investments, FSCS will assess the claim(s) in the order below in circumstances where the SIPP Operator has been declared in default.
1. Claims made against a SIPP Operator where a solvent IFA is still trading
If a customer makes a claim for compensation to FSCS in relation to their SIPP Operator, but the IFA that advised the customer to transfer their pension into the SIPP remains trading and is likely to be able to meet claims against it, then FSCS will refer the customer to bring a claim against the IFA. This reflects FSCS status as the UK’s statutory fund of last resort, and COMP 9.2.2R which provides that FSCS may postpone the payment of compensation if it considers a customer should first exhaust his or her rights against another party.
In some cases, customers may have received advice to transfer their pension into a SIPP, or investment advice, from an unregulated firm or an introducer who is not authorised by the FCA or whose customers are not protected by FSCS. In these circumstances, FSCS may be prepared to exercise its discretion to assess a claim for compensation in relation to the customers’ SIPP Operator without first referring them to bring a claim against the other party.
This is because customers face significant costs and legal hurdles in pursuing their rights against such firms, including to locate the firm and establish that a duty of care was owed in respect of any advice received. Similarly, unregulated firms are not covered by the jurisdiction of the Financial Ombudsman Service so customers would need to resort to expensive legal proceedings in order to enforce their rights.
2. Claims made against SIPP Operator or IFA where both firms have been declared in default
If a customer makes a claim for compensation in relation to their SIPP Operator, or both their SIPP Operator and a regulated IFA, and their IFA has also been declared in default, FSCS will first consider and pay compensation in relation to the claim against the IFA.
This is because the customer’s IFA will be the firm primarily responsible for advising the customer on their pension and investment choices, including as regards their suitability, and ensures that customers are able to seek recovery of their losses in full.
Compensation in respect of alleged due diligence failures by a SIPP Operator generally will be calculated with reference to losses from a customer’s choice of investment. An IFA will also be liable for losses flowing from the advice to transfer the pension scheme into a SIPP, which may be substantially more than the customer’s investment loss.
3. Claims where the customer has suffered uncompensated losses
Due to the maximum compensation limits that FSCS may pay under COMP 10.2.3R, many customers are left with losses even after receiving compensation in relation to a claim against an IFA.
In those circumstances, FSCS may then consider and pay additional compensation to customers in respect of losses arising from due diligence failures by their SIPP Operator. This is consistent with the fact that customers would be entitled to bring proceedings against both parties in the civil courts, both firms would be liable to pay damages for at least part of the customer’s losses, and the COMP Rules empower FSCS to pay compensation in respect of a protected claims made against each firm.
When calculating the compensation payable in respect of each claim, FSCS will first allocate losses to the claim against the customer’s IFA up to the FSCS compensation limit. This will include, as far as possible, losses flowing from the advice to transfer the customer’s pension into a SIPP and any associated investment losses.
Additional investment losses suffered by customers in excess of the FSCS compensation limit, but not losses from the advice to transfer, will then be allocated to the claim against the SIPP Operator.
This is on the basis that the SIPP Operator would be liable to compensate those losses following a claim in the civil courts and in order to place the customer back in the position they would have been in but for the firm’s due diligence failures. The costs of the two claims are then allocated to the investment intermediation and investment provision FSCS funding classes respectively