Over the past few months, the focus on Sipps has been on capital adequacy, bank commissions, failed investments and takeovers. Price and service are at, or near the top of, an adviser’s checklist when recommending a Sipp, but how often do they delve into the detail of the back office systems used? This is, after all, the engine that powers the Sipp product and advisers need to be sure it has the power and reliability to deliver in the long run, both in terms of regulator requirements and the needs of advisers and their clients.
The FCA’s requirements are increasing for Sipp operators and without an efficient administration system behind a Sipp, there is likely to be chaos. More people will be needed to extract, manipulate and create the data requirements which will inevitably impact on the future pricing, increase the risk of error and may mean some companies are simply not viable in the future.
Since Sipps became regulated in 2007 the requirements from the regulator have increased, partly as it has finally started to understand the product better but also due to its findings in the thematic reviews completed in 2009 and 2012.
Sadly, it identified some bad administration practices and poor controls and the subsequent failure of some Sipp companies provided the FCA with the additional fuel needed to continue its focus on Sipps. This resulted in CP12/33, which was issued in November 2012 highlighting the FCA’s concerns that Sipp operators were not holding sufficient capital to effect an orderly wind-down if they exited the market.
There has been a lot of attention on this – quite rightly so – and it will be interesting to review the regulator’s response, expected at the end of the year. But is it not missing something? If a Sipp operator can meet the capital adequacy requirements – whatever they turn out to be – that is all well and good, but if they have poor administration systems, the Sipp will be heading for the scrapyard and it will be impossible to, in the FCA’s words, “facilitate an orderly wind-down” if they choose to exit the market.
Because of the capital adequacy proposals, advisers are starting to complete more detailed due diligence on Sipp operators but, led by the FCA’s influence, the new emphasis is on finance rather than the back office system powering the Sipp proposition. At some point the realisation will kick in that the price of a product will increase if the back office system is not running smoothly. Online tools are a key element for advisers and often these are of a very high standard. However, just because they come with “go faster” stripes and alloy wheels, it does not mean they are consistent with a back office system that may be more akin to a Reliant Robin engine with fluffy dice.
It is not easy to ensure the right systems are in place at the right cost and with the right number of administration staff and controls. The number of staff employed by Sipp operators varies enormously and there is no right answer to how many Sipps an administrator can look after. It will depend on the flexibility offered by the Sipp product and the controls in place, but the number of administration staff is an indication of how good the back office system is and how well the Sipp is run.