With the regulator taking a close look at the capital adequacy levels of Sipp providers, you can understand the recent flurry of speculation regarding consolidation in the sector.
The FSA is understood to be concerned about the financial position of a number of providers, adding to a list of previous worries. Earlier this year, the regulator outlined proposed changes to address a lack of charging transparency, particularly around how much of the cash account’s interest is retained by the Sipp firm.
As Sipps become increasingly popular with investors, the FSA is right to raise more than an eyebrow or two at the current capital adequacy requirements and poor disclosure evident in some sections of the market. With regulatory concerns adding to commercial problems driven by current market volatility, many smaller players are facing significant challenges.
There are well over 100 Sipp providers in the market and it is inevitable that this number will reduce due to the regulatory and commercial pressures being exerted.
A report this week from Defaqto unearths other areas the FSA should be keeping a close eye on. Top of the list are the “pay to play” panel fees levied on discretionary fund managers.
Defaqto is concerned Sipp providers are reducing their AMCs to appear as competitive as possible to the end investor but are increasingly being subsidised by alternative sources of revenue. This could end up hitting the unsuspecting investor who may get a lower AMC but could end up paying for the extra charges that the Sipp levies on the DFM.
There is always the danger that needless regulations end up hitting investors’ pockets without offering them any tangible benefits.
However, if current charging structures are being manipulated by certain providers to try and make their propositions appear cheaper than they really are, the FSA should add this issue to the list of Sipp problems it is looking to address.
The FSA says it is clamping down on misleading financial promotions with a 32 per cent increase in the number of promotions withdrawn following regulatory pressure. Will this tough stance be extended to the Money Advice Service’s recent misleading “free advice” advert? We are not holding our breath.