FCA capital rules should factor in cash commission

The Financial Conduct Authority should factor the dependency of self invested personal pension providers on current account commissions into the new capital adequacy regime, according to Sipp provider Liberty Sipp.

According to the firm, many Sipp providers take all, or a sizeable percentage of, the interest paid on the bank accounts held by their clients, often without transparency.

FTAdviser previously revealed that six Sipp firms produce more than 10 per cent of their revenue from withheld interest on client cash accounts, with the figure at one firm standing at 40 per cent.

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Liberty warned that essentially Sipp firms’ financial strength is dependent upon a practice that is fundamentally non-TCF and therefore in the balance.

Falling interest rates, as a result of the Funding for Lending Scheme, are also placing growing pressure on the profit margins of those Sipp providers that are reliant on current account commissions. This in itself is likely to lead to increased fees and upheaval for many Sipp investors, Liberty said.

Liberty Sipp is urging the industry to adopt a ‘clean price structure’ that is sustainable rather than, as in many cases, sustained at the expense of the customer.

John Fox, managing director at Liberty Sipp, said: “The current account commissions charged by many Sipp providers are not only blindsiding customers but exposing them to unnecessary risk. After all, if a significant percentage of a Sipp provider’s revenues and profits are coming from ‘interest receivable’, then its financial strength has been built on very weak foundations.

“We firmly believe that the profits that derive from current account commissions should not be included in any calculation of a Sipp provider’s financial strength or true capital position. The irony is that many of the larger Sipp providers that will breeze through the new capital adequacy requirements are the biggest culprits of all.”

Philip Bray of IFA Investment Sense, added: “As interest rates continue to fall, primarily as a result of the government’s Funding for Lending Scheme, Sipp providers that are overly reliant on deposit interest will be forced to review their business models.

“If profit margins are to be maintained then they will almost certainly have to push up their fees. This would clearly be very bad news for Sipp investors, especially if they have to pay fees to leave their Sipp provider for a cheaper alternative.”