The Financial Conduct Authority has proposed forcing self invested personal pension providers to disclose the amount of interest they retain on client accounts in projections, effect of charges and RIY measures in the same way as any other charge to create a level playing field.
The regulator’s consultation on pension freedoms, published today (1 October) revealed that some firms are not including the retained interest charge in Sipp projections and charges information, meaning that projections are overstated and charges are understated.
The paper said: “This reduces consumers’ ability to use charges information to compare products. It also makes Sipp illustrations look more attractive than those for other types of pensions, potentially giving Sipp operators an unfair competitive advantage over other pension providers.”
From 2013, firms were required to treat the retained interest on cash accounts as a charge. Retained interest is the difference between the interest earned on cash accounts by Sipp operators and the interest actually paid to investors.
“It is a requirement of KFIs that the nature and level of all charges are described and our rules were explicitly changed to make clear how that disclosure should be made for the retained interest charge.
“As a charge, it was automatically the case that the retained interest charge should be included in projections. It was also the intent that the retained interest charge should also be included in the effect of charges table and RIY measure for consistency with the projection.”
As retained interest contributes to the profits of the Sipp operator in the same way as other product charges, it was the policy intent that it should be taken into account in projections and projected charges in the same way as any other product charge.
Last year, FTAdviser revealed that AJ Bell lost more than £5m in profits as a direct result of falling bank rates, which reduced the money it retains from client cash account interest.
In 2013, FTAdviser also reported research which showed how dependent providers are on such income, which can generate as much as 40 per cent of a provider’s revenues from withheld interest.
According to the FCA, on average 10 per cent to 12 per cent of Sipp assets are held in cash accounts.
“We estimate that the industry earns about £60m a year from retained interest charges which is not being included in projections, effect of charges tables and RIYs.
“Given the scale of undisclosed retained interest charges and the inconsistent way this is being disclosed, which creates the potential to mislead investors, we propose to modify our rules to clarify that the retained interest charge should be included in projections, effect of charges tables and RIY measures in the same way as any other charge.
“This will enable consumers to compare charges on pension products on a consistent basis and enable firms to compete more equally.”
The drive behind the regulator’s proposal is the introduction of the pension freedoms which is likely to encourage growth in Sipps, both in the accumulation and decumulation stages.