Friends Life fee hike to be ‘tip of the iceberg’

Friends Life’s decision to increase fees on its self-invested personal pension scheme could be the “tip of the iceberg” as a substantial increase in capital adequacy for providers looms, an IFA has warned.

According to Phillip Bray of IFA Investment Sense, most if not all Sipp firms - regardless of size - could be forced to bump up their fees if the Financial Conduct Authority increases the amount of capital they are required to hold.

Last month, FTAdviser sister title Financial Adviser revealed that Friends Life was set to increase its Sipp fees by 21.2 per cent, and giving clients only a six-week notice period.

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However, Friends Life later relented and implemented a longer three-month notice period to give clients a chance to avoid the higher fees.

Mr Bray said: “At some point soon, Sipp providers will be forced by the regulator to increase their capital reserves. As many are making a loss each year, finding this extra cash will be a real problem.

“For many Sipp companies, including the largest ones, ramping up their clients’ fees is likely to be the only practical way to bolster their cash reserves to meet the FCA’s capital adequacy requirements.

“The alternative is to sell out, although this will hit the investor with new terms, conditions, rules and regulations - and even then probably an increase in fees.”

Rules that were initially expected last year and are now anticipated before the end of this month are expected to impose minimum capital adequacy of £20,000, with the actual figure likely to be based on assets under management with a premium on ‘non-mainstream’ assets.

The FCA had initially said ‘non-mainstream’ assets would include commercial property, but many are lobbying for this asset class to be counted as a core asset holding. Some have also suggested the industry could see the return of a permitted investment list.

Standard Life recently changed its stance on commercial property investments to state that it will no longer take out mortgages for clients, while Hornbuckle Mitchell said it would only accept properties that are a maximum of 90 per cent mortgaged.

Dentons told FTAdviser the changes will require it to hold around four times more capital in reserve and could leaves others needing to boost reserves ten-fold. According to the firm, around a third of all mortgage business it sees is mortgaged.

It added that it may be forced to increase fees on property transactions to cover capital adequacy, suggesting that it could levy a charge that it would hold in an ‘escrow’ account.

Martin Tilley, director of technical services, said: “We’re not pre-empting the rules, but I could see a situation where we may seek to levy a fee that we would hold in an escrow account.

“We would like to see a half-way house [on commercial property]. It’s not difficult to transfer, so maybe you are required to hold two to two and a half-times the capital.”