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Is regulation killing the Sipp market?

The FCA needs to give greater clarity over commercial property status, say providers

The growing burden of regulation is in danger of squeezing the life out of the Sipp market as a Money Marketing investigation discovers providers are being pushed towards more “vanilla” investments.

New capital adequacy requirements and the FCA’s thematic review of the market are being brought to  bear on the Sipp market. 

The regulator has already issued several warnings on “widespread” failings within the Sipp market, culminating in a ‘Dear CEO’ letter to Sipp providers last July and the capital adequacy rules in August.

Part of the way Sipp operators’ capital is calculated is based on the proportion of ‘non-standard’ assets they hold. In August, the FCA said commercial property can be considered a standard asset. But our -research suggests providers still do not know where they stand on the treatment of property.

So could regulatory pressures dent the appeal of Sipps? And could Sipps’ historic attachment to property ultimately be severed? 

Investment restrictions

Money Marketing’s survey of a cross-section of the Sipp market found some providers pulling away from offering non-standard assets following the FCA’s moves to tighten controls on the industry.

AJ Bell has changed its investment criteria following the regulator’s thematic review last year to mirror the FCA’s standard investment list, while Liberty Sipp will only accept standard assets from clients “in line with the FCA’s definition”.

Hornbuckle says it remains a full service Sipp provider but will block investments that have led to “poor customer outcomes” based on “quality and liquidity”.

James Hay has introduced extra controls, including a limit on non-standard investments and a new advice requirement on investments, such as unregulated collective investment schemes.

Since the capital adequacy rules were published, Barnett Waddingham has closed one Sipp and opened another, which will not have as large a range of investments. It says this is unconnected to the -thematic review and the capital adequacy requirements, which come into force in April 2016 .

Dentons will still accept all the asset classes it did before the changes.

More2Sipps principal John Moret says: “The full-blown Sipp is getting blown out of the water by regulation.

“The thematic review has meant companies have put in place stricter due diligence than was the case a few years ago. Certain investments, such as Ucis and unquoted shares, are just not being accepted.”

But Moret says while investments like Ucis might be inappropriate for large numbers of people, they may be suitable for some wealthy clients. He warns Sipps may fall behind other types of investment, such as Isas-, as regulations encourage providers to restrict investments.

He says: “What may bring this to a head in the years to come is there
has been a lot of interest in crowd-funding via an Isa. If you allow them for Isas, it gets difficult not to allow them for pensions, but it would be very difficult with the regulations as they are.

“There’s a case for greater investment freedom in the post-April world as people strive for greater -investment returns.”

James Hay head of technical support and chairman of Amps Neil MacGillivray agrees.

He says: “The bulk of the market will become more vanilla as a result of the capital adequacy rules and the Dear CEO letter. Firms have already tightened up considerably on this.”

Talbot & Muir head of tech-nical support Claire Trott argues that -regulation could hamper the Sipp -industry’s reputation.

She says: “Regulation has given Sipp providers an unnecessarily hard time over the past few years, especially where a lot of the issues it has focused on have been the investments held within them, rather than the Sipps themselves.”

Dentons director of technical -services Martin Tilley adds: “It’s -absolutely crucial advisers are able to determine exactly what Sipp operators’ propositions are now and will be going forward as I suspect there have been several changes in terms of asset acceptance and fee structures over the past 12 months.”

Graph 190215 p10

Clear as concrete

Property has long been a cornerstone of Sipp investment, yet its future inclusion within Sipp wrappers is under threat from a lack of regulatory clarity.

It has been six months since the FCA made its U-turn on whether commercial property was classified as a standard or non-standard asset. It said the asset could be counted as a standard asset but only if it can be “realisable” within 30 days.

However, providers are still struggling over how to define property as it relates to capital adequacy. AJ Bell said it was treating property as a standard asset, while Suffolk Life is adamant it is non-standard.

LV= is reviewing its stance, while Liberty, Rowanmoor and Barnett Waddingham say they are awaiting FCA clarification.

Dentons has split the asset class in two. It says it will treat property as standard if it is held freehold or leasehold without a mortgage or where the mortgage is covered by other liquid assets of the Sipp. However, if a mortgage exceeds a scheme’s liquid assets or if the property is held jointly with an external party, it will be considered non-standard.

Defaqto wealth insight consultant Gill Cardy says: “The first thing that strikes me is the difference in -approaches. Some are saying property is standard, some aren’t, and some are saying they are thinking about it.

“There should be some greater degree of clarity. Sooner or later someone will be wrong. Someone will fall the wrong side, when the regulator decides one way or the other.”

Sense Network network development manager Phillip Bray says providers’ differing interpretations of property’s position will not have an immediate impact, but will “eventually lead to some providers coming out of property entirely”.

He says the FCA needs to define precisely what it means by “realisable” before firms can judge whether property meets the requirement.

He says: “The FCA needs to determine what it means by realisable. To me it means ‘able to sell’. The rules are designed to create an orderly transfer if a Sipp provider goes bust. In which case, investors probably wouldn’t want to realise their property or fixed term bonds. Frankly, the term needs clarification.”

An FCA spokeswoman says: “We set out in our policy statement that standard assets should be capable of being accurately and fairly valued on an ongoing basis and readily realised within 30 days, whenever required.

“A provider should determine whether the asset is indeed capable of being realised within 30 days. It may be that in reality, due to relevant parties being on annual leave or -delays obtaining information, for example, this would take longer than 30 days to process. However, a Sipp operator must identify whether it believes the property would be -capable of being realised within this time period.

“The firm should be best placed to understand the type of UK commercial property it administers within plans, although in some cases this may ultimately require assessment of an individual asset. We expect firms will treat most UK commercial property as standard.” 

Expert view: Sipp providers under pressure

It is a sad fact that the regulatory focus on Sipps over the past few years is producing an outcome where there is less choice for investors, both in terms of provider and available investments. 

There is clear evidence that the regulatory burden has led to a number of smaller Sipp providers throwing in the towel. 

There is also no doubt that in the regulator’s eyes, this is a positive outcome as it has turned the screw in the past few years through its increasingly frequent thematic reviews and poorly constructed capital framework. 

The confusion over whether commercial property is a standard or non-standard investment is just one example.  

The new framework has still not addressed the fundamental problem of poor advice, of which there have been too many examples. Expecting Sipp providers to carry the can for an inadequate advice monitoring regime is unreasonable.   

The unfortunate consequence is there has been a contraction in the number of ‘bespoke’ Sipps – the type that offers the greatest investment freedom. That seems at odds with the new freedom and choice in retirement options when the choice of the right investment strategy will be crucial. 

In the post-April world there are very strong reasons to believe the Sipp market will continue to grow dramatically, albeit largely through platform-based and ‘slimline’ Sipps. Competition will continue to intensify and the battle will increasingly be fought around customer experience.

Creating an environment of loyal customers in the new world of pensions freedom will be all-important. Technology will undoubtedly be an enabler – which is why some platforms are well positioned – but that alone will not be sufficient. Being able to demonstrate that the customer is genuinely at the heart of a business through a benchmarking and assessment process will be just as important. That applies to all Sipp providers, large and small.

John Moret is principal at MoretoSIPPs


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There are 6 comments at the moment, we would love to hear your opinion too.

  1. Perhaps the most striking aspect of this is FCA’s failure to address the evident confusion. There is little point in the ‘spokeswoman’ simply repeating the current guidance when that’s the problem because it’s not clear. As Gill Cardy has stated, someone is getting it wrong. To stand by and let this continue verges on negligence.

    When something blows up it will be intresting to hear from the FCA why it sat on its hands when it knew there was an issue…

  2. I think we should bear in mind that most of the recent horror stories about SIPPs seem to centre around recommendations to invest in high risk, off-piste and often wholly inappropriate asset classes and schemes, about which the FCA is quite right to be concerned.

  3. Surely the greatest problem has not been regulation, but the FCA’s unwillingness/inability to regulate on Sipps.

    It keeps revisiting the market hoping the problem will have gone away, but it doesn’t understand as it can’t make Sipps fit neatly into its product pigeonholes.

    The horror stories seem to come from sharp practice, which demonstrates that the FCA cannot differentiate between commercial real estate and high risk – shonky – investment projects.

    It already demonstrated it couldn’t regulate on this matter, or surely this wouldn’t have taken them by surprise.

  4. Michael.White.BoutiqueCapital - Bridging Loans 20th February 2015 at 10:53 am

    Regulation = Confusion generally and lack of choice for the consumer….this is a theme in all markets…. Well done to the FCA et al.

  5. General articles like this fall into the same pit that the FCA has fallen into in that the SIPP market is treated as a single homogenous market, whereas nothing could be further from the truth. The bulk of the so-called SIPP market (by number of SIPPs) is run by a very small number of platform SIPPs that have always been, and will continue to be, invested in what the FCA has defined as standard investments. At the other end of the spectrum are the full, or bespoke, SIPPs that are geared to clients with more adventurous/sophisticated requirements and there is also an in-between sector of the market that is largely geared to standard investments. Those SIPP operators in the full, or bespoke, end of the market have, or certainly should have, been aware for some time of the fact that the FCA has placed high regulatory burdens on them. Whether or not this regulatory burden is excessive is irrelevant – it’s in place and it can only go one way … and that’s tougher.

  6. Shouldn’t something logical be applied? The FCA proposal for cap ad for small advisory firms is to allow commercial property as a capital adequacy item, but at an 80% discount to the market value.
    It is over 20years since I worked alongside my bank manager as his clerk and property had a market value and a forced sale value. You can sell anything in 30days, but it will be the forced sale value sometimes. Manston Airport sold for £1 but had the local community been given time to raise the money, they would have paid more, much more.

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