For Sipp providers, while all eyes have been on the looming changes to capital adequacy rules, another storm has been quietly brewing.
Sipp providers negotiate the rates paid on cash held within the wrapper and then offer an interest rate to clients. However there is not always a clear line of sight between what deals providers agree with banks and the rates ultimately offered to savers.
What is more, some providers are taking much more for themselves than they are paying out to their customers. To be clear, we are talking about the rates paid on Sipp cash holding accounts here, rather than deposits or cash being used as part of an asset allocation strategy.
Our snapshot of the Sipp market gives an insight into who are the saints and sinners when it comes to skimming off client cash.
There are several issues raised by this stealth margin grab by Sipp providers. The obvious one is should firms be engaged in this practice at all, or should all of the margin in fact be passed to clients? Some firms already do this, so why are they penalised for a business model that rewards customers instead of the providers’ directors?
Another concern is how sustainable a model geared around margins on cash can be. Some providers are said to have built and estimated future profits solely on this income, which is all well and good in a rising interest rate environment but when rates are at record lows the model looks somewhat unstable.
The screw has already begun to tighten. Royal Bank of Scotland recently announced plans to slash interest from 0.75 per cent to 0.4 per cent from February, and will stop paying interest on Sipp cash accounts altogether from March.
There is also the question of how creaming off at clients’ expense sits in the supposedly transparent, post-RDR world. In its bid to clean up the retail investment market, the regulator all but forgot about platforms until the last minute. It looks set to do the same here.
Sipp guru John Moret puts the hit to revenues from squeezed margins on cash at £80m a year. On top of this, the cap-ad rules signal a wave of mergers and acquisitions, and the accompanying challenges for due diligence. There is also the as yet unknown impact of any reforms to pension tax relief on providers’ bottom lines. Sipp firms are in for a bumpy ride.
Natalie Holt is editor of Money Marketing – follow her on Twitter here