When Finalytiq founder Abraham Okusanya posted his review on Sipp provider financial sustainability recently, he opened a can of worms. For me, the most welcomed aspect of his review was the spotlight on how hard it is to do financial due diligence on financial businesses and how this might be resolved.
There is a requirement for advisers to make professional judgements on behalf of investors on the viability of a business based on its financial performance against its long-term strategy. This is especially pronounced among Sipp businesses given the huge difference in size and structure of Sipp operators but it applies to platforms and providers as well.
Abbreviated and abridged
There have been huge changes in recent years to improve access to information and transparency. Access to pretty much all statutory documents is instant, online and free. The requirement to convert to IFRS or New UK Gapp accounting principles has also brought in broader disclosures, as well as tighter accounting standards, control registers and arguably clearer use of English, such as “receivables” and “payables” instead of “debtors” and “creditors”. This is ironic given IFRS is largely based on US rather than UK accounting.
Historically, the biggest problem with financial due diligence on small companies is that they could file abbreviated accounts. A change from 1 January should have closed down the loophole that allowed them to do this, making due diligence a lot easier. However, this has been replaced by the option to file abridged accounts. Provided they get the consent of all shareholders, small companies can choose to abridge the balance sheet, the profit and loss, or both. The threshold for a small company has risen to a turnover of £10.2m, balance sheet of £5.1m or 50 employees. So has there really been such a significant change in transparency here?
Unravelling a set of accounts among group structures and sister companies in a meaningful way, especially those with offshore businesses, is often an enormous and time-consuming task. Inter-company recharges have to be disclosed but you have to know where to look and how to interpret them to really understand what is going on.
Okusanya told me that, of the 40 providers they looked at, 19 filed abbreviated accounts and two had group structures that made it hard to separate out the Sipp business.
Accounting principles will always be open to some legal manipulation, especially where small business accounts are not audited. For example, creating and releasing provisions from one year to the next can distort profit and loss figures. Even with clear, unambiguous accounts, there is a need to review more than just one year’s worth given the arbitrary nature of a financial year-end, which could see significant transactions pushed into a different reporting period. Over a number of accounting years these things smooth out but you cannot see the true picture without that track record or without understanding what has happened to the balance sheet and not just the profit and loss.
Regulated businesses have to have their accounts audited and an auditor’s work may well be reviewed by a supervisor and signed off by a partner in the firm, which should iron out the more obvious mistakes or inconsistencies. However, auditors are often less experienced than the team they are auditing and history has shown us that even the biggest and best firms have missed serious problems.
Performance against strategy
Meanwhile, financial performance has to be tracked against long-term strategy, and long-term strategies are not audited and filed at Companies House. A public statement of strategy might support whatever message suits at the time, although for global businesses it does not do any harm to look at expectations in other territories. The UK “distributes” products in a very different way to other European countries, for example, and a European owner might expect a certain market share, not just profitability on a par with other UK competitors. They might be driven by a set internal rate of return. They might not be concerned about a return at all.
Accounts are unavoidable
Looking at accounts is essential. They should be the most reliable source of truth despite the issues I have highlighted above. Simply asking a Sipp provider if they are financially secure is not adequate, as nobody has ever said “no” to that question. Dialogue is good but should be driven by direct questions having looked at their accounts rather than letting them lead the discussion. Using third party reviews is fine, subject to the usual caveat that it is important you understand what the process and limitations are when producing them. Based on the problems faced, how much can advisers really be expected to understand purely through their own research?
It seems to me those Sipp providers that filed full accounts without being required to do so should be commended for their transparency, and there should be questions raised about those providers who do not do so, even where this is within the letter of the law.
Phil Young is managing director at Threesixty