Almost exactly a year ago, the then Financial Services Authority laid down a marker of its intention to regulate the booming self-invested pensions market more closely.
Having issued veiled warnings over potential churning of clients into Sipps and in relation to the higher fees such savings vehicles typically charge, the regulator in consultation paper CP 12/29 revealed that it would be forcing new disclosure rules on the sector to mirror those imposed on traditional personal pensions.
Having faced criticism for offering too much flexibility for Sipp operators, the FSA’s new rules, which came into force in April of this year, removed the exemption for self-invested pensions from disclosure requirements relating to fees and retained interest.
What do the rules require?
The rules state that Sipp providers have to disclose any commission they receive or bank interest earned on scheme members’ funds, including on funds held in client cash accounts.
They also call for more information to be made available on key features illustrations, including:
- giving consumers an indication of the potential variability of returns;
- tables showing the effect of charges over the lifetime of a contract on the value of the fund; and
- reduction in yield measure, which demonstrates how charges effectively reduce the investment growth.
Compelling providers to reveal more information was a response by the regulator to concerns including poor quality disclosure of charges by Sipp providers, with the FSA’s July 2012 thematic review of the market revealing that some consumers had been switched into Sipps without good reason, thereby incurring extra charges.
Instances of poor conduct also existed, including inadequate risk identification and risk mitigation planning, with provider approaches to disclosure requirements varying widely.
The industry was initial resistant to the new rules, with trade body the Association of Member Directed Pensions Schemes stating ahead of the publication of the paper in May 2012 that the possible introduction of new disclosure rules would add little value to consumers.
Specifically, Amps claimed clients simply need a ‘broad’ understanding of what price bracket their pension fell into. It also said that the requirements had not taken the costs to providers - and therefore ultimately customers - of providing enhanced disclosure into account.
Amps chairman Andrew Roberts said: “In terms of cost, it should be sufficient for consumers to understand broadly what price bracket a personal pension falls into and this can be done in a number of ways without worrying about spurious accuracy.
“Understanding how fuel efficient your new car will be could be a complicated calculation but usefully there is an accepted scale to aid comparison.”
He added that clients did not value complex illustrations, while the industry could not support an “expensive proposal with no added value to the consumer”.
Nonetheless, the FCA claimed that the previous exemption of Sipps from disclosure rules had to stop, with the products becoming mainstream and the disclosure consultation paper stating a more market-wide regulatory approach was appropriate in line with ordinary personal pensions.