The recent proposal by the FCA in CP15/30 that Sipp providers should be obliged to disclose retained interest charges in projections and reduction-in-yield calculations has prompted a spate of articles suggesting that this is a new revelation. I don’t know where the authors of these articles have been hiding over the last twenty years but this source of revenue has been commonplace virtually since the first Sipp was launched.
Over the years there has been considerable debate about the legitimacy of taking this “interest turn” and the lack of associated transparency. A vocal minority have gone so far as to argue that “skimming” the bank account in this way should be banned.
Others have suggested that providers should be compelled to reveal the underlying interest rate that they earn from their banking partner. What the proponents of these arguments appear to forget is that this practice isn’t unique to Sipps. Life companies for many years have pooled personal pension contributions and taken an interest “turn”, albeit for a matter of days or weeks. The practice of pooling of client monies is commonplace in other arms of financial services too.
The problem with Sipp cash accounts is the scale of the income stream – partly as a result of the frugal rates that have been and still are offered to investors by providers, and partly because the cash can remain uninvested for several weeks if not months. The latter point becomes all the more relevant in the new world of pension freedoms with increasing numbers of Sipps likely to be used in association with drawdown. As a result, a cash “pool” is likely to be an increasingly significant part of an investor’s drawdown investment strategy.
The FSA first raised concerns about this issue in their consultative paper CP11/03 in early 2011. Not for the first time, there was a long delay before matters progressed through the publication of a further consultation paper CP12/05 and finally through CP12/29, which included new disclosure rules for Sipp operators effective from April 2013.
Looking back at that document and the feedback the FSA had received on its earlier proposals, it’s interesting to note that the regulator commented: “There was also some support for the proposal to require firms to disclose the fact and extent of interest rate retentions by scheme operators or scheme trustees. However, some respondents had strong objections to disclosing the amount of interest retained, if any. Some firms argued that calculating and disclosing these amounts will involve significant costs, breach commercial confidentiality and provide limited benefits for clients.”
Given that reaction we should hardly be surprised the FCA have found issues with the way in which their rules regarding disclosure in this context are being applied by some Sipp providers.
In CP15/30 the regulator says: “However, it has become apparent, through our supervisory activity with firms, that some firms are not including the retained interest charge in Sipp projections and charges information as we had intended because of an uncertainty around how our rules should apply. The effect of this is that projections are overstated and charges are understated.”
Under the disclosure regime introduced in April 2013, Sipp operators are required to disclose “the amounts (or if the amounts cannot be given, the formula by which the amounts can be calculated), if any,” which the operator receives as retained interest.
The problems with this are that the “formula” will not necessarily help in establishing the impact of any retained interest – and of course the impact varies depending on the extent to which an individual Sipp is invested in cash, and for how long. I shall be very interested to see how the FCA propose to make this disclosure meaningful and ensure “a level playing field between Sipps and other pensions”.
Just to be clear, I am totally in favour of greater transparency in this area. However, I think the implications of requiring Sipp providers to disclose the commercial arrangements that they have negotiated with their banking partner or to ban such interest “retentions” altogether are profound.
In my response to the earlier FSA and FCA consultations, I suggested all Sipp operators should be required to disclose if interest is retained and should also state clearly the rates of interest payable to the investor and the options available to the investor in the form of alternative accounts (and the associated costs).
In addition, Sipp operators should be required to provide an indication of the average interest retained in their last financial year (or similar) across all client bank accounts.
This would be the total interest revenues divided by the average total client cash funds held during the financial year. I simply don’t believe it is practical to insist on disclosure of any interest retained at an individual investor level. I am also not convinced by the latest FCA suggestion that the retained interest charges should be included in projections.
The closing date for feedback on this part of CP15/30 is the 4 January 2016. It’s important that all those with an interest in the Sipp market should take the opportunity to respond. The secret, if indeed it was ever a secret, is well and truly out – but it’s important to keep a balance.
What’s more, with everything else that Sipp providers currently have to contend with, a draconian shift on this issue could well be the straw that breaks the back of many Sipp providers.
John Moret is the founder of MoretoSipps