The Sipp industry, as highlighted by the recent FSA consultation paper CP12/33, ‘A new capital regime for Self-Invested Personal Pension operators’, is under growing scrutiny. In fact, within the next year or two, we expect the Sipp landscape to look vastly different to how it is now.
Understandably, the ins-and-outs of what’s happening within the Sipp industry aren’t on all IFAs’ radars — they’ve had enough on their hands with RDR — but there’s no doubt the forthcoming changes will affect many of them, and in some cases quite considerably.
So what’s happening? The FSA is concerned that a number of Sipp operators may be close to failing. As outlined in its thematic review of Sipp operators published in October, it is particularly concerned about the level of high-risk investments held by some Sipp operators and the lack of underlying capital to protect against sudden liabilities.
In short, the FSA feels that certain Sipp providers, especially those with a poor understanding of regulatory requirements and a large percentage of non-standard assets, could be putting investors’ assets at risk.
The controversy surrounding Caribbean property fund Harlequin is perhaps the latest example of why the regulator is concerned. Either way, it’s now planning to put in place new capital adequacy rules for Sipp providers.
The new capital adequacy rules are likely to be quite stringent and will almost certainly result in a reduction in the number of Sipp providers in the market. Some will be bought out, some might merge and others, if bigger Sipp providers are put off by their high percentage of non-standard assets, could go into administration.
Clearly, many advisers’ clients will be affected as a result of these changes. Therefore, to avoid a mad scramble when they come in, advisers may wish to consider carrying out additional due diligence now on the Sipp providers they use to ensure they will be able to meet certain capital adequacy requirements.
These days, IFAs should ask not just about investment options and charges, but should focus on the sustainability of the Sipp operator, too. This sounds extreme but it shouldn’t be at all, as it’s the IFA’s right to go to a Sipp provider and ask how the coming legislation might affect his or her client.
Questions advisers may want to ask include:
What is your response to the FSA’s proposals outlined in CP12/33?
Will you be able to meet the new capital adequacy requirements?
How much capital do you currently have?
If an IFA doesn’t ask these questions, and a Sipp provider subsequently gets bought out or goes into administration, this will clearly affect the relationship with the client. At best it will amount to a lot of work for advisers, many of whom are still adjusting to the additional workload that came with RDR.
The FSA wants to see a more balanced and sensibly run Sipp industry, where providers have the financial strength to serve their investors well. It is serious about this, too, not just giving the industry a shot across the bows.
Make no mistake, a new capital adequacy regime is coming to a Sipp near you and the sooner you seek to address how it might affect your clients, the better.
John Fox is managing director of Liberty Sipp