Delving for data – what’s happening to Sipp providers?

Some fascinating and interesting statistics on the Sipp marketplace are buried deep within the FCA’s website.

Reliable information on Sipp providers is hard to find. FTAdviser's sister title Money Management Magazine runs surveys, but many providers choose not to participate, making it hard to get a grip on the overall market.

Since the end of 2007, however, the FCA have been collecting product sales data on a quarterly basis, including stats on the number of providers actively setting up new Sipps, which tells an interesting story…

The Sipp market was very buoyant from the end of 2008 until late 2012, with at least 100 different providers actively setting up new Sipp each quarter. 

In Q1 2010, 112 firms were active and the FCA have said that, in the year from Q2 2011 to Q1 2012, 120 different firms were active (though the highest number in any single quarter was 110). 

Net incomes have been squeezed with the loss of some income post RDR, reduced bank income and increased competition.

During 2011-12, however, the FCA were undertaking their second Sipp thematic review, which raised concerns about poor compliance, systems and controls, leading to a potential for consumer detriment.

This also coincided with its Ucis review, which later led to a ban on sales of non-mainstream pooled investments to the vast majority of retail investors in the UK. 

Those reviews will have contributed to a small number of firms ceasing to write new business from the end of 2012, with around 100 firms consistently active between Q4 2012 and Q1 2015 – broadly a 10 per cent fall.

Since then, however, the number of firms has dropped by around a further quarter, from 99 firms in Q1 2015 to just 75 firms in Q2 2015. 

The reasons are varied – some firms have stopped trading altogether. Others have simply stopped writing new business. Some have been taken over by larger firms – but even then some of those acquired firms have continued to trade separately so are still counted in FCA figures. 

The new capital adequacy rules are often cited as a reason for Sipp consolidation and the FCA did estimate, in the first cap ad consultation document (CP12/33), that 14-18 per cent of firms affected by the new rules would withdraw from the market.

But, with a drop of 24 firms since Q2 2015, we’ve already seen a greater reduction than that, even before the new capital adequacy rules took effect (from 1 September 2016).  

The reality is that over the last three years, a whole series of financial and regulatory pressures have been leading Sipp  firms to rethink their strategies and business models – and, in turn, an increasing number to choosing exit the market. 

In particular, the regulatory burden has increased dramatically, with increased focus on governance and risk management, alongside a stream of mandatory regulatory changes (not to mention information requests) all of which have led to higher costs. 

At the same time, net incomes have been squeezed with the loss of some income post RDR, reduced bank income and increased competition (particularly from lower-cost platforms).

Some firms also face fee write-offs where clients are unable or unwilling to pay for Sipps holding distressed investments. And some firms are facing loss of clients, where advisers (or clients) are choosing to switch to a different provider. 

All those pressures are set to continue: Sipp providers with a record of profitability, a solid business model, good governance and great systems and controls can thrive. And the retirement freedoms represent a major opportunity for Sipp firms with flexible and efficient IT systems.

But some firms will be looking for an exit – particularly where Sipps are not a core activity. There are many barriers to consolidation, however, so deals often fall through or take a lot longer than might have been expected. 

Meanwhile, advisers will be watching this closely. Most firms seem to have survived the initial implementation of the new capital adequacy rules (albeit with differing interpretations of how they apply) but the core pressures have not gone away. There will be more consolidation within the market. 

Chris Jones is principal of Rock Consultancy