PensionsNov 12 2013

Transparency travails: A new regime for Sipps disclosure

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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.

Industry reaction

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.

‘Level playing field’

More than six months on from the rules coming into force, how has this new transparency changed things?

John Fox, managing director of provider Liberty Sipp, is positive on the new requirements, saying the rules have delivered transparency for clients and a level playing field for providers.

Mr Fox says he had in particular been opposed for a number of years to the way some Sipp providers were not sufficiently transparent about how they took a percentage - or in some instances all - of the interest paid on the Sipp bank accounts held by their clients.

He adds that advisers should ultimately benefit from the new rules, as it should make it easier to get “a full picture” on the cost to the client of a given provider, as well as make it easier to compare prices across the sector.

He said: “This is a good thing for the Sipp industry: its all about transparency and from our experience the advisers are a lot happier.

“There has never been a level playing field among Sipp operators. With the new regulations I believe things are easier to compare a product from a firm like ours with a larger provider.”

Mr Fox is not alone. Other providers including AJ Bell have also welcomed the new regulations, with head of platform marketing Mike Morrison stating that both advisers and clients are happier with the new regime of transparency.

“From a consumer point of view, it’s right that there is a comparable charging regime. It also makes sense that personal pensions and Sipps are treated the same,” Mr Morrison says.

“From our point of view there have been no issues regarding the adoption of the rules.”

More work needed?

Skepticism over the effectiveness of the new rules has also been present. LV=’s head of pensions Ray Chinn claimed in August that the FCA should “flex its muscles” and follow through with regulatory action against those who were slow to disclose their fees.

Mr Chinn’s comments came in the wake of revelations from industry veteran John Moret, known across the market as ‘Mr Sipp’, in April that providers were earning far more of their income from retained cash account in particular than had previously been thought.

Research conducted by Mr Moret’s consultancy MoretoSipps found that six firms produce more than 10 per cent of their revenue from withheld interest and that one firm in the top 10 of the sector by size generates as much as 40 per cent of its revenue from withheld interest.

Mr Moret warned that obfuscation would likely continue, not least because there is a lack of clarity from the regulator on what effective disclosure looks like.

He said: “The [FCA] hasn’t been duly prescriptive and some providers will come up with disingenuous ways of disclosing it.

“I believe the current disclosure rules are somewhat vague and don’t require providers to disclose the actual impact on an investors cash nor the amounts retained. It is a small step in the right direction.

Not done yet

All of this perhaps explains why the new regulator, the FCA, has continued where its predecessor left off and is continuing to look at the Sipps market.

Last month the regulator launched its third thematic review into the self-invested pension market, itself coming hot on the heels of an ‘information request’ that was sent to providers in May 2013 that asked for details on all aspects of providers’ businesses.

The questionnaire focused on non-mainstream assets held ahead of new capital adequacy rules coming into force for the sector later this year, but there were specific questions on cash account interest, such as how much interest is retained, whether a range of rates are offered and how many clients are offered the highest rate.

Mr Fox said: “The FCA is getting used to the Sipp market. It has taken a while for it to get to grips with the sector, but these new [disclosure] rules, along with its third thematic review and new capital adequacy rules, demonstrates that it is now getting the industry into shape.”

Additional reporting by Ashley Wassall