While the subject is harder to get to grips with than, say, capital adequacy requirements, it also has a far more direct and material effects on you and your clients.
The FCA and its predecessor have taken an increasingly keen interest in this subject during the past two and a half years. They use three little words that may not have fully caught advisers’ attention: “systems”, “controls” and “MI” (‘management information’). They each crop up around a dozen times in FG13/8, ‘A Guide for Sipp Operators’. What do they mean and how does it affect you?
Systems
System capabilities affect you. Think of the data you may want: for example, income payments and dates, contribution history, or a percentage of the lifetime allowance used at previous benefit crystallisation events. Gaps in old systems may be bridged with tools like Excel or the data you want may be in spreadsheets rather than in the back-office system.
Automation can deliver significant benefits: fewer opportunities for error, faster servicing times, fewer staff required and lower costs. There can be negative consequences, though. Staff can feel like battery chickens, increasing staff turnover and shrinking the retained experience. It is not always economical or practical to automate everything.
There is also a trade-off between automation and flexibility that goes right to the heart of an operator’s proposition. Eliminating certain manual interventions is highly desirable. However, others may give flexibility to the product, investments or service. If the system is configurable, the operator then has to decide when it is going to allow ‘Computer says no’ to be overridden. This additional flexibility adds value for you and your clients but it also adds risks and costs to the operator. Does the operator draw the line where you want it?
Controls
“Controls” was the most cited of the three words. It refers to preventing things from happening that should not happen or ensuring that things that should happen do. In terms of prevention, controls should stop, for example, drawdown income from exceeding the maximum limit or protection being missed at BCEs. On the other hand, controls ensure, for example, that your clients receive annual statements and statutory money purchase illustrations each year, that money is transferred to an investment manager, or that adviser charging (and the operator’s own fees) are paid.
Controls are dependent on data being in the system and in an available form. Take, for example, receipt of a pension share on a previously fully vested pension, which is recorded by the operator only on paper or in a comment on the system. When the recipient of the pension share comes to draw benefits, the control preventing a further PCLS being paid rests with the skill and diligence of the member of staff. A system-built control, unlike the human one, always remembers, always checks and is never tired, rushed or distracted. Such controls are a great back up to advisers and can prevent many potential faux pas.
But it can be a double-edged sword. For example, the system’s controls may not allow benefits to be paid in specie, even though the scheme rules permit it. However, from time to time circumstances will arise where paying benefits, such as the PCLS or lump-sum death benefits in specie, allows you to deliver a clever solution to clients’ needs.
If the proposition is a flexible one and the system is well configured, there will even be a controlled process for circumventing the controls themselves. ‘User permissions’ control what people can do. They are set so users can only do things within the system commensurate with their roles, training and experience. Where there are more complex or higher risk processes – or where standard controls are to be circumvented for a legitimate reason – further authorisation is required from different individuals with greater skills and responsibilities.
Older systems often have much less sophisticated user permissions or none at all. Aside from leaving the operator – and your clients – more vulnerable to errors or rogue employees, it has other implications, such as affecting the quality of data.
Quality of data may sound abstract and obscure but imagine if anyone can enter any data they like, in whatever way they like. They could, for example, be more than one record for your firm but permission to pay adviser charging may be attached to only one of them. An investment that has failed due-diligence tests, say because the directors have previous involvement in scams, may be entered a second time, slightly differently, and allowed to proceed.
MI
The third little word, “MI” (‘management information’) is significantly dependent on the quality of data as well as other issues mentioned, such as data being in an available form or even in the system at all. It is not just for the management; the regulators have an interest and so do you.
There is a ream of regulatory reporting that has quietly gone on for years – product sales data to the FCA, event reports and accounting for tax to HMRC. But the FCA, in particular, expects much more than that.
High Level Principle 3 says: “A firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems.” MI is integral to doing this. A firm cannot monitor what it cannot measure and it cannot improve what it is not monitoring. MI should act like a profusion of dials on the Sipp machine, showing how everything is operating: service times (for example, for transfers), service quality (number and nature of complaints, for example), concentration of risk, including where client money and assets are held or how they are invested.
Unlike older back-office systems, modern set-ups can handle multiple variables at once, quickly and accurately producing MI that will meet the FCA’s concerns about quality of business, for instance. You should share these concerns. It is no use introducing squeaky-clean business if the operator is gradually, perhaps unwittingly, building a hornet’s nest of issues from those less scrupulous.
A final thought. The capital adequacy proposals were intended to ensure all operators had sufficient reserves “to facilitate an orderly wind-down”. A far more important factor in that, including the potential to find a bidder, may be systems. Ironically, a higher capital adequacy may leave some with fewer funds to invest in systems.
Andy Leggett is head of business development for Sipps of Barnett Waddingham
BACKGROUND
Systems are the very infrastructure of a Sipp operator and all it does: they are central to the operation and therefore your due diligence. Like the Sipp industry itself, systems have evolved during a long period (since 1989 for Sipps). Older systems tend to be standalone without integration, which means they do not join up processes seamlessly. Newer systems are process oriented and so less manual intervention is required. There is often a significant cost attached to moving a client’s Sipp administration from an old system to a newer one (for what the operator may perceive as little benefit to them) and so operators may run more than one system.
Key points
■ The FCA and its predecessor have taken an increasingly keen interest in Sipps’ back office during the past two and a half years.
■ There is a trade-off between automation and flexibility that goes right to the heart of an operator’s proposition.
■ There is a ream of regulatory reporting that has quietly gone on for years – product sales data to the FCA, event reports and accounting for tax to HMRC.
