Fraud in a self-invested pensions market
Unfortunately, in recent months the self-invested pension plan (SIPP) market has been tainted by fraud. In this article we examine events viewed as fraudulent to establish what can happen and whether there is cause for genuine concern.
There have been some high profile and widely publicised cases involving self-invested pensions and rule-breaking. Sadly, there is a danger that these isolated cases may tarnish the industry estimated to be worth some £75 billion with over 300,000 plans in force. The problems at two or three providers involving only a few clients and relatively small amounts of money should not lead to the misconception that fraud is a chronic issue.
So what can go wrong, what are the consequences and what can be done to prevent fraud?
There are two potential areas where problems can arise – internal and external. Internal fraud is a threat to any business. A maverick employee with access to bank accounts or other sensitive processes could steal client funds. This appears to have happened in the recently publicised cases and so robust internal procedures are an essential.
Let us consider the risk of external fraud. SIPPs are very popular because of the vast array of investment options available, including unregulated funds, private equity and loans. A SIPP can pay pension scheme money to a fund manager, company or individual as an investment. If the recipient of these funds has given false information and then makes off with the loot there is very little the pension provider can do about it. Here is an example: an unquoted company is formed. A SIPP then buys shares in that company, and then funds are channelled back to the member before the now insolvent company is wound-up. This is commonly known as “pension busting” and is taken very seriously by the authorities and pension providers alike.
The Finance Act 2004 sets out the HMRC’s powers to levy tax charges and penalties in the event of fraud. These are summarised under the external heading below: Where fraud/theft is perpetrated by an investment provider there is potential for criminal proceedings to recover the full amount.
Internal
| Fraud/theft/regulation breach by staff or directors | Potential criminal proceedings to recover the full amount | Recipient (The provider must make good the loss to the client. This may involve a claim on their professional indemnity insurance) |
External
| Type Of Payment | Charge Payable | Payable By |
| Unauthorised payment charge | 40% of the amount paid | The recipient e.g. scheme member or sponsoring company |
| Unauthorised payment surcharge | 15% of the amount paid where this exceeded 25% of the pension fund | Recipient |
| Scheme sanction charge | 40% of the amount paid, reduced to 15% where the unauthorised payment charge has been paid by the recipient | Scheme Administrator |
The penalties for fraud are very severe. Where the pension provider acts as Scheme Administrator (a formal duty registered with HMRC) hefty financial and other penalties are likely. The FSA can also effectively shut a provider.
Countering Fraud
To counter internal fraud a clear and unavoidable segregation of duties is required. This mainly involves the handling of client bank accounts, but covers all areas of the company’s operation. No one individual should be capable of transferring or removing funds or placing investments, with client money. Any requirement to transfer money must be broken down between different responsible individuals within the organisation so that the placing of the payment request, the setting-up of the payment, the checking and the authorising are all carried out separately. The FSA is particularly concerned about the way small providers handle client bank accounts, as they tend not to have sufficient resources to segregate these duties.
IFAs should inspect a provider’s segregation of duties policy as well as details of the professional indemnity insurance as part of their thorough due diligence on recommending a provider. They must be satisfied they are not exposing their clients to potential fraud. To counter the threat of external fraud, the provider must be satisfied that any non-FSA regulated investments are genuine, before proceeding. In the case of private equity, loans etc., this means carrying out suitable due diligence and record keeping. IFAs and their clients will have peace of mind from a provider that operates robust due diligence.
Of course, not even the most thorough due diligence can stop a committed fraudster, who falsifies records and documentation to make fraudulent investments. HMRC, expressing deep concern over this, has set up a tax evasion hotline so possible fraudulent or criminal activity can be reported.
Bearing in mind the popularity of self-invested pensions in the UK, it is important for everyone concerned – providers, advisers, clients and regulators – to work together to stamp out wrongdoing, so that the huge majority of enthusiastic investors can continue to benefit from the flexibility on offer. It will be a great shame if the allowable investment range is trimmed because of the actions of a tiny and unscrupulous minority.