Growing pains

2012 is likely to be a defining year for SIPPs, by the time the RDR is upon us the SIPP market is likely to look very different and it will almost certainly have contracted. But there are reasons to be positive – the SIPP market can and will emerge improved, better capitalised and delivering more for advisers and investors.

Before explaining why, it is important to look at the events that have lead up to now. SIPPs have been endlessly discussed and it is easy to forget they only became regulated relatively recently in April 2007.

SIPP administration has long been a fragmented business, with a large number of small firms vying for business. Significant consolidation among SIPP providers was predicted in advance of regulation, recognising that, for many businesses, the overheads and costs of regulation would be prohibitive. Whil that consolidation has not yet happened to any significant extent, it is clear from the FSA’s thematic review that some SIPP operators have adopted a ‘light touch’ approach to regulation, perhaps not fully understanding all that they should be doing. So the FSA’s current focus on bringing all companies up to the same standard could prove challenging for some organisations.

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Resting on their laurels

The astonishing growth in the SIPP market – generally estimated at around 30%pa since A-Day – has drawn in new providers and been a real impetus to innovation with new propositions from both existing and new providers. Technology played its part too, lowering costs and making SIPPs more affordable to a wider range of advisers and end investors. But the growth has been focused at the low-cost and streamlined parts of the market, tailing off for some of the smaller, traditional firms.

Not all new entrants were successful though. While some platforms have gained reasonable momentum, other newcomers have not. Included in the 100 or so smaller SIPP providers that cover less than 20% of the market there are fund managers, some advisers and other wealth managers who all thought that running their own SIPP would complement their businesses.

The end result is a collection of SIPP providers, for many of whom SIPPs are not central to their businesses, running a sparse number of SIPPs – a number that is static or slowly losing ground to the larger providers who have the critical mass of business necessary to survive. The FSA knows this and, from informal feedback, is concerned.

A worried regulator

The regulator is busy and it is of course also about to change responsibilities. It is estimated that there are more than 800,000 SIPPs in force today offered by 116 providers – a problematic number to regulate and supervise, especially when half of them have less than 2000 SIPPs on their books. And at the end of 2011 the regulator confirmed that they were indeed concerned about significant parts of the SIPP market.

In fairness to the regulator neither SIPP providers nor advisers should be surprised. The FSA’s manager of pensions investment policy Milton Cartwright has been taking a keen interest in the SIPP market since he first spoke at the Henry Stewart SIPP conference in July 2009. It was back then that he stated that the capital adequacy requirements of SIPP providers would need to be reviewed.