Does FCA’s third thematic review point to flawed framework?

The regulator indicated its intention to undertake another Sipp review in October 2012, following its findings of its second Sipp thematic report. It says the latest thematic review will specifically focus on operators’ financial resources, operational procedures and controls, and quality of business.

The second review, following a previous review in 2009, found widespread failings, particularly with firm compliance with regulatory requirements.

John Moret, principal of consultancy business MoretoSipps, says the latest probe will specifically seek to ensure firms have taken note of the findings of the FCA’s second thematic review and have responded accordingly.

What is meant by ‘quality of business’?

One advantage to using a Sipp is they are fairly flexible and will allow you to invest in more esoteric investments, as long as they comply with HM Revenue and Customs tax rules.

Given this the FCA focus on ‘quality of business’ is particularly interesting, especially in light of new capital adequacy rules that, if the current draft of new regulations passes unchanged, will draw a sharper line between mainstream and non-mainstream assets.

The review also comes at a time when esoteric assets held through Sipps have hit headlines for all the wrong reasons, with Serious Fraud Office investigations ongoing into the likes of overseas property firms Harlequin and Arck LLP, to which a number of Sipps firms are heavily exposed.

Greg Kingston, head of marketing at Suffolk Life, believes some Sipp firms have sustained high new business volumes on the back of highly illiquid investments. He says it will be those firms the regulator will pay particular attention to.

He explains: “I’m sure that most, if not all, Sipp operators will have a number of these investments on their books. The good ones will have few and, what’s more, will understand the risks that this poor quality business represents and will have demonstrable controls to prevent accumulating any more.

“The regulator will take particular interest in those with high volumes and limited or no controls, and who could argue with that?”

The FCA will also be examining areas such as due diligence, with research undertaken by advisers and investment managers likely to be a key area of investigation, Mr Moret adds.

He says: “I imagine they will be analysing vast quantities of data as they have in the past looking at attrition rates, the nature of investments and any other characteristics which appear unusual and which, in their view, suggest there may be consumer detriment.”

The FCA has launched its third thematic review as it was wants to see an improvement in the overall standards of systems and controls amongst Sipp operators, Mr Moret says.

He says: “Management should be able to demonstrate that they have taken the necessary steps to meet any concerns that had been raised as a result of the second review and subsequent FSA workshops.”

Mr Kingston adds while there is not an instruction guide on how to run a Sipp operation, there has been sufficient guidance from the regulator meaning Sipp firms should know in what direction to head.

Predicted outcomes

Mr Moret fears some operators, particularly the smaller ones, will fall short of FCA expectations in terms of the level of research they carry out before adding investments onto their books.

He says: “In particular without a significant and arguably disproportionate investment in technology or additional resources I believe that a number of Sipp operators will never be able to provide the evidence to confirm that they are operating their business to the standards required by the FCA.”

Mr Kingston believes those firms who are not living up to the standards expected by the regulator can expect enforcement action from the FCA. He adds that in some cases the FCA may censure firms, but warns it may take more extreme measures in other more serious cases.

Mr Kingston says: “Sipps have been tarred by many brushes in recent years - frequently unfairly for the majority - and it is now appropriate to take action against those who have caused damage to the market, specifically those that are little more than vehicles for the selling of questionable investments.”

Adam Wrench, head of business and product development at London & Colonial, says the FCA’s requirements for Sipp operators will force consolidation in the industry - a view held by many.

He adds: “However, I believe the review will lead to further increased levels of protection for the client.”

Regulatory framework is flawed

More broadly, Mr Moret believes the fact the FCA has taken the step of launching a third review in just six years suggests either the regulatory framework is not working or it is inappropriate.

He says: “I have believed since it was introduced in 2007 that the current regulatory framework is flawed and not fit for purpose.

“This is not simply about FCA regulation – what is needed is an overhaul of both FCA and HMRC rules so that there is an integrated approach and set of rules that protect investors.”

Mr Moret’s view is that the regulatory framework has failed to prevent several fraudulent or ill-conceived schemes usually involving inappropriate investments and questionable advice.

He adds: “That’s where the focus should be and that’s why an urgent overhaul of the whole regulatory framework is required.”

Mr Wrench agrees with the need for the FCA to clamp down on areas of the sector, saying that ongoing questions around Sipps risks damaging not only the sector but whole pensions industry.

He explains: “If too many Sipp operators, large or small, fail to meet the FCA standards this will ultimately damage the Sipp industry and the public will lose confidence in yet another facet of the pensions industry.”

Some have suggested that the review could and perhaps even should result in a return to a prescribed investment list detailing the investments that are able to held in Sipps in order to take the burden away from providers.

Mr Kingston, on the other hand, is concerned the review will not go far enough.

He says: “The better Sipp firms will spend ever increasing resources making changes to processes and controls that are largely already fit for purpose and delivering good client outcomes, whilst the poorer firms make no changes at all and stay in business until the next review, or the next.”