Unregulated pension warning for investors

PENSION investors are at growing risk of being mis-sold into unregulated funds that could leave them with heavy losses or even wipe out their savings altogether.

The City regulator has been forced to issue fresh warnings of financial advisers switching people with self-invested personal pensions (Sipps) into unregulated collective investment schemes (Ucis), despite an ongoing crackdown on the sector.

It is investigating claims that some financial advisers are first moving their clients’ retirement savings into Sipps and then shifting the money into high-risk and frequently illiquid schemes. They include Ucis that invest in overseas property, forestry and film schemes, according to the Financial Services Authority (FSA).

More than 85,000 people have holdings in the £2.5 billion Ucis market, but the latest concerns surround the way in which unscrupulous advisers are using Sipps to sell individuals into the plans.

Sipps are pension tax wrappers that give investors greater freedom and flexibility when it comes to their retirement funds. The market has mushroomed since 2006 but the FSA has over, the past two years, become increasingly vocal about the way in which those investment freedoms are sometimes abused.

While assets such as residential property can’t be held in a Sipp, a huge range of assets can be – and there’s no definitive list of what you can and cannot invest in through the wrapper.

The focus is currently on Ucis, which are already subject of separate proposals to restrict the way in which they are promoted. That followed a series of cases in which thousands of consumers had seen their entire pension savings put at risk by an adviser placing them in unsuitable investments.

The problem is exacerbated further by the lack of liquidity in many Ucis, which means investors may not be able to get their money out of them when they want to.

The risk is made greater again by the fact that because of their unregulated status, investors in Ucis may not have recourse to the Financial Services Compensation Scheme or the Financial Ombudsman Service (Fos).

Paul Lothian, director and chartered financial planner at Verus Wealth in Dundee, said: “As with most other investments, a client investing in a Ucis could lose some or all of their money, but this risk is likely to be particularly relevant to Ucis.

“Ucis frequently invest in assets that are not available to regulated collective investment schemes or are structured in a way that is different. Unlike regulated schemes, Ucis are not subject to investment and borrowing restrictions aimed at ensuring a prudent spread of risk.”

Several large advisory firms, including some with offices in the Scottish capital, have been accused of mis-selling elderly
clients into risky Ucis within their Sipps. In some cases, firms have been forced by the Fos to pay compensation.

Only a small minority of IFAs are culpable – and many of the regulator’s tip-offs have come from more reputable IFAs – but the damage inflicted by those firms can be considerable.

Lothian said: “Since Ucis cannot be promoted to the general public, their ‘manufacturers’ aim to distribute the products through independent financial advisers, who [in general terms] should only recommend them to experienced/high net worth/sophisticated investors.”

The problem for investors is knowing exactly when they’re being sold into something that’s not suitable for their needs or circumstances.

Evidence suggests that people mis-sold into Ucis through Sipps are subject to a common process, which unfolds as follows:

First, the individual is alerted by a research company to the poor performance of their pension investments and told they’d be better off in a certain Ucis. They’re then introduced to an IFA who can help them invest in that Ucis by moving them into a Sipp.

The adviser, the company that provided the “free report” on the pension investments and the Ucis company all get a slice of the pie – in this case, the individual’s lifetime retirement savings – and the mess is left to the client, or another IFA, to try and clear up.

The FSA’s crackdown raises hopes that such abuses will be stamped out. For many pensioners, however, it’s too late.

One South Queensferry adviser was banned last year for selling 57 of his clients into Ucis, including a fork-lift truck driver and his wife who were persuaded to place their entire pension savings into unsuitable, high-risk investments.

The adviser – Patrick Francis O’Donnell, sole director of P3 Wealth Management – was fined £60,000 and banned from carrying out regulated activities.

He is one of around 30 advisers to have been punished by the FSA for mis-selling clients into Ucis.