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Sipp providers brand FCA illustrations rules ‘not fit for purpose’

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Sipp providers say the key features illustrations they are required to produce for clients are “worthless” and “not fit for purpose”.

Since 2013 Sipp firms have had to provide KFIs in the same way as other pension providers.

In October this year the FCA proposed adding the margin retained on clients’ cash holdings as a charge on the illustrations.

But firms say KFIs do not help advisers or clients compare providers.

Suffolk Life head of communications and insight Greg Kingston says: “There’s a problem for both consumers and advisers. If you go back to the true purpose of the illustration it’s to create a scenario where you can compare costs and charges. As soon as you introduce variables it becomes far less useful.

“For instance, variables that providers put in for growth rates will vary so immediately from year one your projection is worthless.”

Dentons director of technical services Martin Tilley says: “The illustration process provides a lot of factual information on day one, but within seven days it’s factually inaccurate.

“They are extremely detailed but after a year the assets that have performed less well end up being lower proportions. Using the document in future without rebalancing it on a regular basis is self-defeating.

“Unfortunately the regulator doesn’t make that clear to the individual. It’s very quickly obsolete, it’s not fit for purpose.”


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There are 4 comments at the moment, we would love to hear your opinion too.

  1. To be honest the the whole KFI system is rubbish and needs to be canned !! let alone the new SIPP ones.

    If the FCA want to fixate on charges, so be it, but then to mix it in with hypothetical growth rates etc etc etc and then come up with a true reflection of what some-one may be investing into you end up with a worthless 10 or 50 pages of crap that no-one will read and indeed have no relevance, whatsoever !

    What is needed is, charges on one side then a “SHORT” centralised comparison on the other.

    But then when it comes to regulation its never a level playing field anyway !

  2. DH

    I was about to post the very same thing. Thank you. Also to the point – do they really think that clients read this rubbish? Most of the time we are just adding to global warming. Just imagine what an illustration given ten years ago would look like today!

    The charges could, as you so rightly say, be presented on one piece of paper. But this should also include the adviser charge. As fees are now the norm they would not otherwise appear. Moreover, if, say, you were to construct a portfolio of ten or twenty funds, the clients would lose the will to live if presented with a KFI package of this size. Surely, it would make sense to have some sort of composite which took account of the charges of each fund. Indeed this could be done by the platform on valuations. Just add an extra column beside each fund showing the cost of that particular investment. This would take into account the size of the investment – not just the (say) 0.75%. So if the fund had a value of £7,500 the fund charge would be £56.25 for the year. To this the other charges could be added to the total at the bottom. This would then be of use – not the drivel upon which the regulator insists.

  3. Very wise words gentlemen, and very true into the bargain. My concern is that FCA don’t give a toss that all illustrations given to the clients are useless drivel. Pages of meaningless crap and as for the KIDD per fund, well thats just insane.

  4. The personalised KFI was of some use when it first appeared because it drove out of the market the very high cost ‘savings plans’ then being mass marketed by some life companies which could have an RIY over 10 years as high as 6% pa (e.g. General Portfolio, Target Life, Irish Life, London & Manchester etc). It was also better than the previous illustration rules where all illustrations were the same no matter what the difference in charges (which was a major contributory factor to the mis-selling of ‘low cost’ endowment mortgages). The subsequent move to different growth rates made projected values useless for comparison (although the resulting RIY still at least gives some guidance as RIY does not vary much by growth rate). When I asked the FCA why they did this I was told that projected values are not meant for cost comparison but to help ‘financial planning’! In any case, the rules don’t include the effect of fund switching charges which might be highly relevant if the adviser service includes active tactical asset allocation.

    Having analysed many projected values I also find that the accuracy varies greatly by both provider and type (and era) of plan. Providers seem to have a variety of legacy systems for calculating projected values on old plans some of which provide very dubious results.

    My conclusions are twofold (i) whatever method of cost disclosure is decreed, it should be annual and not just at the ‘point of sale’, and (ii) costs can vary greatly not just between providers and products but also between clients according to how they use the options in the product. Only the adviser is aware of all these nuances – not providers – and so it is the adviser who should be producing the illustration showing the effect of all the charges. That may sound frightening but only because most advisers have never looked into how to produce illustrations – assuming that it is very hard and only providers could possibly do this. Wrong assumption. For example, the only way to have a robust cost comparison process for legacy replacement business is for the adviser to have the tools and to be able to include all the relevant charges, including their own which can and should vary between products according to how much manual work they have to do. Being dependent on dubious projected values from providers is no way to be independent.

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