RegulationOct 10 2016

Sipp providers forced into a corner by regulation

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Sipp providers forced into a corner by regulation

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.

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.

In the struggle to reach capital adequacy, many Sipp providers may just about be able to operate but then they may not have sufficient capital on top of that to grow their business. Martin Tilley

"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.

Mr Tilley explained: "Providers have to go through their asset book with a fine-toothed comb, as well as through all their discretionary fund management relationships, to ascertain what is and what is not a non-standard asset as per the regulator's definitions.

"Moreover, since the pensions freedom and choice regime came into force, the regulator needs reports on how many defined benefit pension transfers have been received and who from, data on how much business has come though introducers, how many clients have requested uncrystallised funds pension lump sums, how many have gone into drawdown - the list goes on.

"All this data is now required, which ordinarily a Sipp provider would have had no way of delivering, and now they have to spend so much time on creating reporting programmes. This all adds to costs."

As a result, he said there has also been a "knock-on effect" as to what Sipp providers will now accept, and many are changing their propositions.

He said: "We changed some of our propositions as the FCA said we would have to evidence all non-standard assets. We also restrict the proportion of a Sipp that can be put into certain asset classes."

Mr Tilley said there were some non-standard assets Dentons avoided completely. He explained: "While we were happy to accept a wide range, we drew the line at others, such as Harlequin. 

"We were even invited to participate in an agricultural development in Eastern Europe. When we interrogated the person offering this to us, we found out it was near Chernobyl. 

"We commented on this but the gentleman assured us: 'The wind had been blowing in the opposite direction'."

Needless to say, Dentons did not add this to its non-standard assets.

His comments came after the FCA's Product Sales Data Report revealed Sipp operators in the UK had reduced by 25 per cent from June 2015.

FTAdviser reported that Chris Jones, principal at Rock Consultancy told delegates of the market contraction at the Associated Member Directed Schemes conference on 21 September.

Mr Tilley added: "We have already seen some consolidation but we will see more.

"In the struggle to reach capital adequacy, many Sipp providers may just about be able to operate but then they may not have sufficient capital on top of that to grow their business or redevelop their systems and rewrite programmes should any new legislation come out.

"As mentioned, we do sympathise as the regulatory burden of preparing for and complying with the capital adequacy regime has been high and previously unforeseen."