Pensions  

Pressure on Sipp fees as bank rate revenues at risk

Pressure on Sipp fees as bank rate revenues at risk

Concerns have been raised that looming changes to international banking rules which could pile pressure onto bank account rates could contribute to an increase in self-invested pension fees, as profits linked to retained interest are placed at risk.

Ahead of the third round of reforms to bank risk pricing next year, known as Basel III, there is concern that rising costs for banks could lead to a drop in rates offered to the likes of Sipp firms offering customer cash accounts.

This may in turn force firms to hike charges to make up any shortfall - and comes at a time when looming capital adequacy changes are already expected to force many firms to review their administration costs.

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Speaking to FTAdviser, John Fox, managing director of Liberty Sipp, said: “Sipp providers have turned a blind eye to this issue so far, but I think many IFAs are wising up to the potential for increased fees.

“Along with the looming capital adequacy rules from the FCA, this could create something of a perfect storm.”

As previously revealed by FTAdviser, many Sipp providers withhold bank interest and only pass on a portion to clients. This reduces the amount clients receive in interest, but in some cases rates remain above average despite the provider retaining a portion of the amount paid by the bank.

Some providers are thought to make up to 40 per cent of their profits from retained account interest. Last year, AJ Bell’s interim statement revealed that its £5m drop in profits was “entirely” due to the fall in bank rate on the cash account.

The European Banking Authority’s new rules state that any money banks hold on deposit will have to be matched with liquid assets that could cover the deposits within a 30-day period.

This reduces the bank’s ability to earn their crust on such deposits and many may turn to those sources where they are likely to get a better return, with the types of cash held on deposit with Sipps likely to be an unintended victim of the EBA’s regulation.

John Moret, principal of consultancy business MoretoSipps, said that the key issue for Sipp providers will be profitability and if the income stream from bank deposits is curtailed then they will have to look elsewhere for income.

“This all comes at a time when Sipp providers costs are increasing as a result of regulatory change and the costs of re-designing systems and processes to be fit for the post-April regime; not to mention growing competition from platform providers.”

Martin Tilley, director of technical services at Dentons, added: “We have already seen some posting of significantly reduced profits for one or two operators where the interest rate reductions have already bitten and trail returns have been reduced; this may well be a continuing trend over the next 12 months.”

peter.walker@ft.com