FCA warns of Third Generation pension scams – What to watch for when transferring your pension

We explore the warning signs of a Third Generation DFM-based pension scam

The Financial Conduct Authority has published a warning on its website, describing how pension scams involving high-risk investments have been evolving, continually putting more and more pension savers at risk of losing their hard-earned nest eggs.

The notice, which followed on from the FCA’s famous 2014 ‘Dear CEO’ letter, seems to have been primarily aimed at SIPP providers and Independent Financial Advisers, urging them to think-through their ‘due-diligence’ checks before recommending pension investments to retail clients, particularly those that involve Discretionary Fund Management (DFM) – we’ll get to that later!

The Old Pension Scam Models

The FCA letter provided a little detail about what scam victims and leading CMCs have known for some time, about how the older pension scams worked:

“First Generation scams offered unregulated physical assets – such as commercial property – for direct investment”. The fact that these investments, which also include overseas property, storage units, carbon credits and forestry schemes, are unregulated means they are high-risk and have no compensation available if they fail, only suitable for some investors.

“Second Generation scams obscured those underlying unregulated physical assets by creating a special purpose vehicle (SPV) to acquire them using funding raised by the issue of corporate bonds”.

OK, so Second Generation pension scams were a little more complicated – Instead of investing directly into the holdings, you invested your SIPP pension money into corporate bonds that disguised the true nature of the underlying investments.

Third-generation Pension Investment Scams – The DFM model

Finally, the FCA moved onto the new methods: “Third-generation scams now use the services of a discretionary fund manager to create an investment portfolio that does not require the direct input of the investor; this portfolio then invests in SPV bonds”

So, third-generation pension scams are effectively a variation on second-generation ones – adding another layer of disguise to the investment by having a DFM manage the funds, or as the FCA put it; “The reason for this evolutionary process appears to be to obscure the nature of the ultimate underlying investment”.

Identifying non-standard investments

A non-standard asset, amongst other things, is one that “must be capable of being accurately and fairly valued on an ongoing basis and readily realised within 30 days, whenever required”. This comes down to ‘liquidity’ – can you sell these investments quickly? If not, they are most likely non-standard investments.

Non-Standard Investments by themselves are often not regulated by the FCA, meaning there is no compensation available should they go wrong, from either the FSCS or the FOS.

Often, they are based abroad, made up of things like hotel investments, other offshore properties, storage units, forestry schemes and even diamond and rare-metal investments.

Because of their liquidity and often unregulated nature, they are considered high-risk, being made available ONLY to people who are High Net Worth Individuals (earning over £100k+) or Sophisticated Investors (who really know what they are doing with these investments in their SIPP account).

But identifying these investments is made more difficult when they are wrapped up in an SPV, and then placed within a DFM portfolio, with little say or input from you, how would you even know that you have been sold high-risk investments?

Worried you might be a victim of a Third Generation – DFM Pension Scam?

It’s not known just how many people have been affected yet, but we do know that the team at Spencer Churchill Claims Advice are perfectly placed to assess your SIPP investments and DFM portfolios to see if you have been put in the position the FCA is concerned about.

Your initial assessment is FREE of charge, and if it looks like you have been mis-sold, we can offer our claim services to you on a NO WIN – NO FEE basis*  to help recover your pension from a risky spot, leaving you nothing to lose by following your nose and investigating your advice.