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

This article is part of
Regulatory Changes for Sipps - November 2013

Last month, the Financial Conduct Authority launched its third thematic review in six years into the Sipps market. While the move was not unexpected, the review’s focus on quality of business is perhaps intriguing.

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.

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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.”