The FSCS has published a report today, showing the number of claims linked to Sipps has risen by 59% this year.
Mark Neale, FSCS chief executive, revealed there was “a risk of a supplementary levy on life and pensions advisers, resulting from more rapid growth in claims than we forecast in the Spring”.
He said: “We recognise that this is unwelcome news for many firms. We have provided this update to allow firms the time to prepare for the possible levies.”
He said: “These are claims against advisers, which result from bad advice to move retirement funds out of occupational pension schemes and into Sipps and then to invest in high risk, unregulated investments within the Sipp. These are complex claims to assess for eligibility and to quantify for compensation.”
The FSCS said claims typically related to advice given by advisers to move funds from existing pension arrangements and invest into non-standard asset classes held within Sipp wrappers.
The FSCS stated: “These investments were often high risk and unsuitable for the majority of investors. Some of the non-standard investments seen with these claims included hotel rooms in Caribbean holiday resorts, storage pods and plantations of oil producing trees in Asia.
“Inevitably, because of the risks some of these investments failed. Consequently, FSCS is receiving claims about the advice to invest in these products.”
The FSCS reported it had received claims against 171 firms in total; four of those firms account for 73% of the compensation paid.
Mr Neale said: “We currently expect to pay just over £136m in compensation in 2016 /17 and to incur administrative costs of more than £7m.
“We are also forecasting a deficit in the home finance intermediation class, and may also need to raise a supplementary levy on these firms.
“As a result of these unforeseen handling costs, FSCS may also need to spend in excess of our approved management budget, but within the reserve allowed for in our Management Expenses Levy Limit (MELL). When fixing the MELL each year, an allowance is made for additional but unforeseen costs. We will also make a decision about this in January.”
However, there was “better news” in the report, with claims against investment advisers down significantly against forecasts.
A surplus in this class this year of around £60m is expected.
Officials said they plan to apply this as a credit to firms in the class, either against next year’s levy or to offset any supplementary levy costs, or both.