Assessing vulnerability: How can firms help mitigate risks of DIY SIPPs?
On 12th May, the FCA published its latest Dear
On 12th May, the FCA published its latest Dear CEO letter, which outlines specific guidance for Self-Invested Personal Pension (SIPP) operators towards implementing and complying with the Consumer Duty along with other concerns in this market.
Noting the increased risk that many SIPPs carry due to their often larger-than-average pot size, the letter highlights the regulator’s main areas of concern alongside measures firms should be taking to mitigate potential harm to consumers.
And naturally, the sheer scope of the Consumer Duty rules means there’s a lot of ground covered.
So, we’ve picked out the three main lessons for SIPP firms:
Good outcomes start with rock-solid product governance
As a first step to ensuring every customer receives the best possible outcome for the assets within their SIPP, the Consumer Duty’s Products & Services outcome requires businesses to clearly identify the specific target market for each of their products and services.
This step is especially crucial for SIPPs as – despite often being associated with higher charges, administration fees and/or other fixed transactional costs than standard personal pensions – the wide range of investments options make them potentially appealing to a significant cross section of consumers.
Because of this, SIPP operators should carefully consider if their target markets currently include individuals for whom these products may carry a risk of foreseeable harm or otherwise not offer true value for money. And if not, you’ll need to go back to the basic Consumer Duty principles and discern whether it’d be best to remove these customers from your target markets entirely.
For example, will the customer really benefit from the level of flexibility offered by SIPP arrangements – or does it simply heighten the risk of inappropriate investments being able to be used?
Once your target markets have been defined and stress-tested at a sufficiently granular level, you’ll need to confirm your distribution strategy still makes sense and is appropriate for the intended audience.
Consumer Duty means there’s no room for complacency
Representing a step up from the FCA’s previous Principle 6, which stated firms must simply ‘pay due regard to the interests of its customers and treat them fairly’, the Consumer Duty will mandate businesses to take a more dynamic and motivated approach to achieving good outcomes for customers.
The new Principle 12 states ‘A firm must act to deliver good outcomes for retail customers’, whilst the Cross Cutting Rules make it clear firms must actively seek to avoid causing foreseeable harm to consumers and proactively support them in reaching their financial goals.
Unsurprisingly, achieving this markedly higher standard of customer care will require SIPP operators to conduct effective due diligence on an ongoing basis.
This means not only monitoring your own conduct, process and product offering but strong and effective due diligence of those who introduce business to you or the investments permitted within the SIPP.
Data is the key to a futureproof compliance strategy
Under the Consumer Duty, the FCA has made clear that it intends to follow a much more data-led strategy characterised by a ‘show me, don’t tell me’ approach to evidencing and supervision.
Consequently, firms will need to apply a critical lens to their current data and monitoring infrastructure to verify they’re able to provide the level of insight necessary for the regulator’s data requests – upgrading existing and/or implementing new channels where needed.
But beyond that, you’ll also want to look at ways to strengthen data sharing with third parties to ensure you’ve addressed any blindspots within customer lifecycle.
For instance, gathering sufficient MI on intermediaries and introducers – particularly in higher-risk cases such as those where non-standard investments are allowed.
The FCA highlighted the efforts of some firms to prepare for Consumer Duty were superficial or over- confident.
For expert advice on getting Consumer Duty ready or simply independent assurance you’re on the right track, we can help – get in touch today.