A concerted focus from the regulator – thematic review work originally carried out by the FSA and subsequently continued by the FCA – on the core mechanics of the Sipp market has meant that providers operating in this space have been compelled to undertake a fundamental appraisal of their business model and their product/service proposition.
Advisers should make themselves aware of the key findings and recommendations from the thematic reviews, but ultimately the regulator was not impressed by the level of risk being taken by some providers and the lack of processes to underpin core Sipp business disciplines.
They have felt the need to introduce a new capital adequacy framework for the providers operating in the Sipp market.
But with the final unveiling of the FCA’s new regulatory framework for Sipps, in the form of a Policy Statement, not due until the second quarter of 2014, we are all still debating the outlook for the Sipp market in 2014/15.
Market consolidation
Defaqto has long predicted that the high number of providers operating in the Sipp market (our research database currently covers more than 80 Sipp brands) was unsustainable and would reduce over time. This market contraction has needed a catalyst and it is expected that the FCA’s Capital Adequacy Policy Statement will drive market consolidation. There have been early signs that this will be the case.
However, as with many things in the Sipp market, this will not necessarily be straightforward, due to:
Fringe activity – Some smaller providers, which also run financial planning arms, have decided to call it a day in order to focus on their core activities and this has seen the sale of their Sipp business book to other providers in the market.
Cherry picking – Rather than full-on M&A activity, we have seen some Sipp providers seeking to target a specific segment of another provider’s book of Sipp business. This behaviour could continue, with providers being keener on the acquisition of Sipp businesses comprised of ‘Standard’ assets, as defined by the FCA, as opposed to ‘Non-Standard’ assets.
Lengthy process – Anecdotal feedback from the market suggests that due diligence processes on potential Sipp business acquisitions can take anything up to 12 months or beyond to complete. Deal conclusions and timeliness will ultimately be dependent on the price and business fit being right, but nowadays they are also reliant on the purchaser company’s comfort with the Non-Standard assets that are being acquired.
Sipp administration fees
The core administration fees associated with Sipps are the establishment fee, annual administration fee and investment transaction fee. Defaqto has seen average fees for each of these disciplines decrease in recent years across all segments of the market, due to:
Market pressure – The level of core Sipp administration fees will remain under pressure for commoditised Sipps due to the high level of competition for business in this segment of the market.
Rise in specialist fees – The level of specialist ‘non-standard’ administration fees is likely to increase if provider capital adequacy requirements are directly linked to their exposure to non-standard assets. Rather than not offering access to a specific investment type, providers might use an increase in associated administration fees to test the resolve of the adviser and client to utilise the investment.
Read across from the platform market
Where Sipps are intrinsically linked to a fund trading platform they will, by association, be caught up in the share class shenanigans which are impacting on the platform market at present.
Income drawdown outlook
Personal pensions and Sipps remain a key facilitator of capped and flexible drawdown for clients seeking flexible retirement income solutions with continued equity exposure. With pressure on the level of annuity rates, and the results of the thematic review on the annuity market, the outlook for future income drawdown business levels is positive and this will by association be of benefit to Sipp providers.
It’s a case of ‘something has to change’ in the Sipp market, but the full impact won’t become clear until we’ve all seen the FCA’s Policy Statement later this year.
Matt Ward is wealth management consultant at Defaqto
EXPERT VIEW
Matt Ward, wealth management consultant at Defaqto
Mr Ward notes that Sipps have long been seen as a ‘flexible friend’ due to the wide range of permitted investments that could be included within a client’s Sipp portfolio.
But he warns: “However, the risks (posed to the provider, adviser and client) associated with owning and trading some of the more esoteric investments have now been highlighted by the regulator as part of their thematic review work.
“Ultimately, some of the investment flexibility will be lost in the new-look Sipp market, although we see a healthy market in the future to be one that will at least provide some choice as it always has done, but with more clarity around classification.”
POTENTIAL CHANGES
WHAT MIGHT THE FCA INTRODUCE?
Defaqto highlights some potential changes to permitted investments in Sipps as the industry evolves:
• Permitted investment list The return to the market of an official permitted investment list for Sipps, which could be governed by the FCA and/or HMRC, has been mooted. Defaqto says it is supportive of this development. Ultimately, all parties in the process need to be clear about which investments are ‘on and off piste’ from a Sipp perspective. Providers can then decide which of the investments on the permitted list are to be made available through their products.
• Who is the list important to? Historically, Sipp providers were trying to showcase their range of permitted investments to financial advisers. Due to the increase in investment outsourcing the choice may now be of more importance to the third-party investment specialists, such as discretionary fund managers.
• Commercial property the key differentiator Beyond portfolios constructed with collective investments and/or direct equities, commercial property purchase and servicing will continue to be the key differentiator between commoditised and bespoke Sipp propositions.
