FSCS for Investments Query

tfc

The Sunday Times last Sunday had an article concerning the limit on protection for investors in private pensions or SIPPs.

The article seemed to be warning people against the dangers of holding large amounts on one platform in case the platform company fails. Compensation would be limited to the FSCS limit.

However, what actually is the situation if the platform provider fails? A reputable platform does not hold clients investments like a bank holds savers' money. They are held by custodians.

So why is the danger because a platform fails? It would, no doubt, be very inconvenient, but am I wrong in believing the article's claim that the clients will 'lose their money' as a result.

Is it not more dangerous if the custodian fails? Does the protection scheme protect against custodian failure?

masonic

Typically the assets are held in trust by a subsidiary of the platform company and both would be put into administration, since the custodian would be unable to meet its obligations to the beneficial owners of the assets if the management company stops trading.

Possible sources of a loss would include institutional fraud and administrators' fees, but you are correct to disbelieve the claims that the failure of the companies would automatically lead to a loss for clients.

The limits can be found here: https://www.fscs.org.uk/what-we-cover/pensions/
SIPPs are limited to £85k compensation and there is no upper limit for other types of pension.

To suffer a >£85k loss in a SIPP, supposing your pension was worth a couple hundred thousand, someone would have had to stolen a significant proportion of the total assets under management of the pension company and got away with it. This is pretty much impossible if you stick with one of the major providers.

EdGasketTheSecond

It is also not cost-effective to have several SIPP providers and pay them all charges for everything you want to do.


Doesn't the fscs protection just apply to cash held on the platform? The investments in funds/shares etc. would be held by the nominee; not sure what protection there is for that except it is supposed to be seperate from the platform and just an admin service so supposedly no scope for going bust although there could still be a potential for fraud I suppose?

Malthusian

The danger is essentially that it turned out the platform was running a bucket shop and wasn't actually holding the investments it said it was. In this case you would be relying on the FSCS.

For this to happen on any noticeable scale would require an incredibly sophisticated and yet incredibly dumb fraud; if you want to extract a large amount of money from running an investment platform, you don't have to siphon off investors' money while keeping the fraud concealed, you can just run it properly and then sell the business. Then you don't have to go on the run.

The worst platform collapse in recent memory was Beaufort. (More recently there is SVS, but losses haven't been quantified yet as far as I am aware.) In Beaufort's case losses attributable to investors were capped at £10,000 and covered by the FSCS. So a collapse would now have to be 8.5x worse than Beaufort to cause losses to investors.

You should still not dimiss the inconvenience of being without access to your portfolio for a year or longer. Especially if you use a small provider which is losing money by administering your portfolio.

SonOf

This is where financial strength and overall business come into play. Also, the software they use as well.

If you go with a small player, then it is vital they are financially strong. Its important for any company but more so for smaller ones as they are at risk of more events that could cause a company to close.

Software is important as well. If the platform is using FNZ or one of the other major platform software providers then there will be very little in-house coding. So, the chance of internal fraud is lower

So why is the danger because a platform fails? It would, no doubt, be very inconvenient, but am I wrong in believing the article's claim that the clients will 'lose their money' as a result.

Inconvenience would be the major factor.

The customers of a mainstream platform would be an asset to a potential buyer. One of the other platforms would look to pick them up cheap whilst in administration or even before it gets that far. However, if that didn't happen, then the platform may not be able to carry out trades for a period (which could go on for a year or more). So, the risk is really more about accessibility to your funds.

If you go off the mainstream then you are taking increased risks which are probably not worth it.

tfc

Thanks everyone for your useful comments drawing out some of the associated issues. It was very interesting.

I noticed that today, there was a small panel in the Sunday Times slightly backing off from the previous article and making some of the points made here.

Stu_Pen_Does

My first post on this interesting and useful forum, and trusting this is the right place.
I am still a little unclear about the levels of FSCS cover across pensions, investments and platforms.
I have a SIPP and an ISA under the Nucleus platform. Both are separately >£85k.
My IFA tells me a SIPP is covered 100% though if Nucleus is the SIPP ‘operator’ then FSCS says the comp limit is £85k. I am unsure because FSCS says Pension providers (qualifying as contracts of long-term insurance) are covered 100% though Pension Investment cover is capped at £85k. I am unclear on the terminology.
Furthermore, I have both a SIPP and an ISA on the platform and, if the provider fails, are these two investments covered separately or aggregated?
I also have a pension pot from my most recent employer (outside the platform) which is a group personal pension scheme, which I and my employer paid into. The provider (Scottish Widows) assure me that this scheme is covered to 100% of value despite the FSCS site stating they don’t cover Occupational Pension Schemes. Could someone explain in simple terms the difference, please?
Scottish Widows also told me that their cover was 100% even if one of the underlying investments failed, and on this I am not so confident they really understood my question.
Finally I am led to believe that, where I have invested with a single provider in both the SIPP and the ISA, (in different funds) then the FSCS cover is for the aggregated total of these investments, even though part of it is in a pension scheme. I guess this is the same as having more than one account with one (single licence) bank?

Having just retired, and imminently going to draw on my pension schemes I reviewed the investment and security of these. I hadn’t realised it was so multi-layered. I did have a holding in the ISA with Woodford, and hearing the doom mongers at Davos etc., I am wary of a ‘correction’ and would like to hold onto the savings I have, even if they don’t grow so much.

I would appreciate any explanation or advice on this.

Albermarle

Pensions held with 'Insurers' are 100% covered with no limit.
In English this means that personal and workplace pensions held with the likes of Scottish Widows; Standard Life ; Aviva etc are fully covered for the platform and the funds . These type of pensions only use their own funds . These pensions are very heavily regulated .
SIPPS are less heavily regulated and offer funds and investments from the whole market. Here there is a £85 K compensation limit , so I think your IFA is wrong .
As far as I know the SIPP platform is covered for £85K , as is each fund you hold on it and any cash held by the SIPP with a bank has a separate £85K cover . However from other things I have read and posts on this forum , this is not crystal clear and there seems t be some grey areas so don't take my word for it.
In reality a mainstream SIPP platform and mainstream regulated funds and investments are very unlikely to ever have any problems ( they are not banks , lending money to all and sundry) so the risk is extremely small .
Not sure if you would class Nucleus as a mainstream operator (I have never heard of them ) but they could well be well known in the IFA world ?

SonOf

My IFA tells me a SIPP is covered 100% though if Nucleus is the SIPP ‘operator’ then FSCS says the comp limit is £85k.

That is not correct.
Insured pension contracts/funds are 100% covered by the FSCS but Nucleus is not an insurance company and does not offer insured funds. So, it would be £85k.

I also have a pension pot from my most recent employer (outside the platform) which is a group personal pension scheme, which I and my employer paid into. The provider (Scottish Widows) assure me that this scheme is covered to 100% of value despite the FSCS site stating they don’t cover Occupational Pension Schemes. Could someone explain in simple terms the difference, please?

Scottish widows is an insured product using insured funds. It is not an occupational pension scheme. It will be a group personal pension most likely. This will have 100% FSCS protection.

Scottish Widows also told me that their cover was 100% even if one of the underlying investments failed, and on this I am not so confident they really understood my question.

I suspect there is some misunderstanding here. Underlying investments refers to assets within a fund. If one of those failed you would not get any FSCS protection as that is just part of investing. e.g. If you held a UK equity fund and it held BHS when that failed, then you get nothing from the FSCS.

Having just retired, and imminently going to draw on my pension schemes I reviewed the investment and security of these.

Most modern drawdown plans are SIPPs. So, its £85k per fund house. There are a couple of insured PPPs that do drawdown and they are 100% FSCS protection. However, they are only available via IFAs and some FAs.

I did have a holding in the ISA with Woodford, and hearing the doom mongers at Davos etc., I am wary of a ‘correction’ and would like to hold onto the savings I have, even if they don’t grow so much.

Corrections occur every couple of years. All quite normal and they are always coming. FSCS protection will not be activated during a correction.

Not sure if you would class Nucleus as a mainstream operator (I have never heard of them ) but they could well be well known in the IFA world ?

Tends to be used by wealth managers/FAs as you have to commit to using Nucleus which is fine for FAs but potentially problematic for IFAs. Many IFAs will not risk their IFA status by committing to use one platform like that. Although some do. They are not particularly well priced either. So, personally, I have never seen the attraction.

Albermarle

Most modern drawdown plans are SIPPs. So, its £85k per fund house. There are a couple of insured PPPs that do drawdown and they are 100% FSCS protection. However, they are only available via IFAs and some FAs.

I currently have an older personal pension with Standard Life . If I want to move to the drawdown stage and stay with SL , I know I have to move to move to a new scheme.
When I check the website carefully it actually means changing to a SIPP with them ( as you have indicated ) although it only offers SL insured funds , so more like a PP than a SIPP in reality.
Presumably this means than I will be moving to a lower level of FCSC protection? ( although I guess with a provider like SL this is not really a cause for concern)

SonOf

Albermarle wrote: »

I currently have an older personal pension with Standard Life . If I want to move to the drawdown stage and stay with SL , I know I have to move to move to a new scheme.
When I check the website carefully it actually means changing to a SIPP with them ( as you have indicated ) although it only offers SL insured funds , so more like a PP than a SIPP in reality.
Presumably this means than I will be moving to a lower level of FCSC protection? ( although I guess with a provider like SL this is not really a cause for concern)

If the SIPP provider offers insured funds and you use them, then you get 100% FSCS protection on those.