Robert Graves, head of pensions technical services for the Rowanmoor Group, said: “When the Sipp sector began it was largely regarded by the FCA’s predecessor, the FSA, as something of a niche product for high net-worth individuals and thus not really worth regulating too much, but now that there’s been over 1m of them sold, the FCA is bringing the level of regulation up to the level seen in other popular financial products.”
In particular, he added, the FCA is under increasing pressure to tighten up on the capital adequacy requirements of firms in the sector, which up until recently were regarded as extremely light.
In this respect, although the FCA has already said that it wants to raise the minimum amount of capital a Sipp administrator needs to hold from £5000 to £20,000, there are calls – including recently from the Association of Member-Directed Pension Schemes – that the level should be at least £50,000 plus 13 weeks’ expenditure for the time being.
Clearly, such a rise in capital adequacy requirements would be most severely felt by smaller firms in the sector, which may be part of the FCA’s rationale in such a hike, according to Tom McPhail, head of pensions research for Hargreaves Lansdown, in Bristol.
“There does appear to be a regulatory push right across the pensions sector towards larger, well-run financial providers; we are hearing similar noises coming out of the Pensions Regulator.”
He added: “Looking after an investors’ life savings is a responsible business and with auto-enrolment driving more and more customers into the arms of the pensions industry, it is essential that schemes are well run.”
Limiting the number of small firms operating within the Sipp sector would possibly suit the FCA from the perspective of making its day-to-day oversight duties easier, as many small firms operate on a bespoke basis with their customer Sipps that can be much harder to monitor than the broader-based generic schemes of the bigger firms.
Mike Morrison, head of platform marketing for AJ Bell, in London said: “It is much easier for the FCA to see investment illustrations for client Sipps that simply involve tracking three or four investments into this or that major fund, but looking at a bespoke property-related Sipp put together by a small firm is a much more difficult prospect to unravel.”
A case in point often cited by those who believe that Sipps should be in the hands of bigger firms, of course, is that of Montpelier Pension Administration Services, whose managing director, Kevin Wells, was banned by the FCA from performing any significant influence function at any regulated firm on the basis that he had operated without an adequate understanding of the Sipp operator’s regulated activities and corresponding regulatory responsibilities or of his own responsibilities as the managing director of the firm.
However, to portray smaller firms in the Sipp field as being necessarily less robust in their observance of client protective protocols is misguided, underlined David White, managing director of Hornbuckle Mitchell in Leicester.
“The issues for any firm in the Sipp sector are the same, and it could be argued that a small firm has a senior management team that is perhaps even better connected to what is going on with its Sipp programmes across the board than those of much bigger firms.”
Plans also mooted by the FCA to link Sipp capital requirements to a firm’s assets under administration, from the current formula of the ratio of expenditure to AUM, also misses the key point, according to industry insiders.
Ian Bell, executive chairman of Pointon York Sipp Solutions, said: “Any metric based principally on AUM is generally meaningless, as, for example if we hold 50 thousand shares in a company at £1 each and the next day it goes up to £2 each, it will not impact the costs of what we do, or the effectiveness with which we deal with clients, or the rigour with which we deal with client money.”
In addition, he said, although the notion of tightening up capital adequacy ratios further by including only liquid assets is one that has underpinned all major financial sector reforms around the globe in the past year or so, notably Basel III, the FCA needs to be careful about which assets they label as being ‘illiquid’.
“Liquid should obviously include all of the usual assets, cash, major shareholdings, and so on, but there is no reason not to include a property, for example, in a property-linked Sipp, that has been leased out to a proper company, with a constant reliable stream of income attached, as even in the event of a failure, this can easily be transferred to another Sipp provider, and is consequently perfectly liquid.”
Ultimately, he concluded, although the FCA might prefer to deal with big organisations like itself in its general mandate to safeguard the UK investing public, the fact remains that one of the biggest scandals of the past few years came not from a small firm, but from the collapse of major insurance society, Equitable Life.
Simon Watkins is a freelance journalist
Key Points
In its thematic review of Sipp operators, the FCA is expected to tighten up compliance.
A rise in capital adequacy requirements would be most severely felt by smaller firms in the sector
The FCA needs to be careful about which assets they label as being ‘illiquid’.
