If anything, the additional flexibility within these vehicles to invest in a variety of asset classes has seen the FCA, and its predecessor the FSA, focus in on this part of the pension market since taking over responsibility for it in 2007.
Mike Morrison, head of platform marketing at AJ Bell, suggests there are really two big regulatory issues in the market at the moment, the first is a series of thematic reviews, including a focus on investing in unregulated collective investment schemes (Ucis), and new capital adequacy rules.
He adds: “We are on our third thematic review, which sort of says we are not doing it right. A good indication of that is one of the areas the FCA has focused a lot on is Ucis.”
He points to a recent alert from the FCA in April 2014 that highlights continued concerns about firms advising on pension transfers or switches to Sipps “without assessing the advantages and disadvantages for customers of the underlying investments to be held within the new pension arrangement”.
The FCA warns: “We believe pension transfers or switches to Sipps intended to hold non-mainstream propositions are unlikely to be suitable options for the vast majority of retail customers. Firms operating in this market need to be particularly careful to ensure their advice is suitable.”
Meanwhile, there is the issue of capital adequacy of Sipp providers, and in particular the suggestion that while part of the requirements should be based on assets, a second part should be based on the type of investments they hold and whether these are classed as ‘standard’ or ‘non-standard’.
The interesting part is that commercial property did not appear on the ‘standard’ asset list, therefore making it a non-standard asset that would require more capital support.
Mr Morrison notes: “That has caused an outcry in the market, in that some forecasts have suggested companies currently holding a couple of hundred thousand pounds worth of capital might have to hold a couple of million. Obviously that could mean Sipp consolidation and/or prices going up.”
Jeff Steedman, head of Sipps and small self administered schemes (Ssas) business development at Xafinity, notes that capital adequacy is a big issue for Sipp providers with a lot of speculation regarding mergers and acquisitions.
He adds: “What we are finding is providers aren’t willing to really sell at the moment because they don’t know what the capital adequacy requirements are. I think there are a few business owners waiting to find out before they decide whether to carry on in business or sell.”
In terms of consolidation in the marketplace, Mr Steedman notes there are suggestions the roughly 110 Sipp providers currently in the market could reduce to approximately 50.
“That would be quite a drop, it means 50-60 companies being bought in the Sipp market and that is a lot of consolidation. So it might not happen as quickly as that, but it depends on the final regulations.
“Effectively all these businesses will have to hold cash in a bank account that is not doing much for them. If you’re running a small business and have to put a large amount of money away that could be a challenge.”
Greg Kingston, head of marketing and proposition for Suffolk Life, adds: “Some of the simpler platform Sipps are picking up good business, both from new business and also transfers from existing Sipps where investors find they are not using all the functionality and so could be cheaper elsewhere.
“The FCA’s ruling and business reaction to it when it comes could well accelerate that process. If prices rise it is natural that consumers look round to see if there is anything better in the market.
“It is quite clear that with low new business volumes the balance sheets of a lot of Sipp providers are under pressure. Greater capital requirements will put them under further pressure, and if low new business started to become no new business and indeed business transferring away, that could drive consolidation as people look to exit.
“It will be the regulatory change that will catalyse many of these subsequent outcomes.”
With the findings of the third thematic review and the rules on capital adequacy both expected to be released in Q3, the next few months should be an interesting time for Sipp providers.
Nyree Stewart is features editor at Investment Adviser
CAPITAL ADEQUACY
PROPOSED DEFINITION OF SIPP NON-STANDARD ASSETS
According to the FCA consultation paper: A new capital regime for Self-Invested Personal Pension (Sipp) operators, it notes: “We propose to define non-standard assets by reference to a list of standard assets. All assets that do not appear on this list should be categorised as non-standard.”
The list of ‘standard’ assets listed by the FCA are:
• Cash
• Cash funds
• Corporate bonds
• Exchange traded commodities
• Government and local authority bonds and other fixed interest stocks
• Investment notes (structured products)
• Investment trusts
• Managed pension funds
• Open-ended investment companies
• Permanent interest bearing shares
• Real estate investment trusts
• Shares listed on: the Alternative Investment Market; the London Stock Exchange; and recognised overseas stock exchanges
• Unit trusts
It suggests the criteria for these standard assets is as follows: “Standard assets must be capable of being accurately and fairly valued on an ongoing basis, readily realised whenever required (up to a maximum of 30 days), and for an amount that can be reconciled with the previous valuation.”
Source: FCA CP12/33: A new capital regime for self-invested personal pension operators
UCIS
DUE DILIGENCE REQUIREMENTS
In finalised guidance issued in October 2013 in ‘A guide for Self-Invested Personal Pensions (Sipp) operators’, the FCA outlines the following stance on unregulated collective investment schemes (Ucis).
“Ucis are complex, opaque, illiquid and risky, and tend to invest in high-risk ventures such as films, green energy initiatives and overseas property funds. They may not be covered by Financial Ombudsman Service (Fos) or Financial Services Compensation Scheme (FSCS) protections.
“We have stated previously that Ucis are high risk, speculative investments which are unlikely to be suitable for the vast majority of retail customers.”
It states: “If firms are involved with Ucis they should ensure that they:
• Have enhanced procedures for dealing with Ucis
• Have key performance indicators (KPIs) and benchmarks linked to the sale of Ucis to monitor the business they are conducting
• Ensure that any third-party due diligence that they use or rely on has been independently produced and verified, or
• Undertake appropriate due diligence on each Ucis scheme – this due diligence, together with all research should be kept under regular review.”
Source: FCA; Finalised Guidance: A guide for Self-Invested Personal Pensions (Sipp) operators
