Sipp providers forced into a corner by regulation

Sipp providers forced into a corner by regulation

Self-invested personal pension providers have been forced to change their propositions, restrict their range and hike fees as a result of regulatory changes, Martin Tilley has claimed.

The director of technical services for Dentons said Sipp operators were going through an unprecedented period of regulatory change, which has put enormous pressure on margins.

He said administrative burdens brought in with the pension freedom and choice regime, coupled with the new capital adequacy rules, which came into effect on 1 September this year, could leave some players unable to grow their business.

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As a result, he predicted more consolidation among Sipp providers, along with changes to their propositions, investment offerings and a continued rise in charges to cope with the higher regulatory cost of doing business.

According to Mr Tilley, the regulatory burden on Sipp providers is "into six figures just to enable a firm to operate".

He said: "I agree capital adequacy rules had to be brought in, but I believe the methodology being used by the Financial Conduct Authority (FCA) is unnecessarily complicated. 

"What has happened is that to meet the FCA requirements in terms of assessing capital adequacy and reporting standards, some Sipp providers have had to do far more in terms of administration, and therefore costs have risen.

"Some players have passed this onto clients. I can sympathise with this position. We can see what the regulator is asking for, and when you add the capital adequacy requirements to everything else we need to disclose, you can see why the costs of doing Sipp business are so high."

For example, earlier this year, James Hay announced it was raising its fees from £50 for clients wanting non-standard investments, to £350 a year.

For unquoted shares in non-standard investments, transaction charges have been raised from £250 to £350.

Neil MacGillivray, head of technical support for James Hay, said: "There is still a market for the full bespoke Sipp but the need to hold more capital and the expense of increased due diligence means the cost has to be passed onto the plan holder.

"That said the market is still extremely competitive and it is essential to ensure plan holders are only paying for the functionality they actually require."

This is why some providers, such as James Hay, have created modular Sipps to enable clients to move from a basic to a full bespoke Sipp as and when required.

Other firms include a basis point fee relating to size of assets and/or contributions. Mr Tilley said: "The logic for this would be capital adequacy based".

Rules on Sipps:

The FCA’s new capital adequacy rules for Sipps came into effect on 1 September this year.

The fixed minimum capital for Sipp operators is £20,000.

Capital surcharge to be applied for firms holding non-standard assets.

Physical gold bullion, national savings and investment products, bank deposit accounts, units in collective investment schemes and UK commercial property will be classed as standard assets.

Source: FCA/Momentum Pensions​

He commented it was not just the actual cost of earmarking £20,000 as a minimum capital adequacy buffer, but the associated complexity of administration.