Head of pensions policy Standard Life
The two years in which Sipps have been regulated is a relatively short time to get to grips with a mountain of rules and principles. Any review of Sipp providers was always likely to find the smallest ones wanting because most, if not all of them, came from a previously unregulated world.
On the other hand, most big Sipp providers came from a world steeped in 20 years of regulation. When Sipps became a regulated product, the big boys knew exactly what they had to do and some were even treating Sipps as a regulated product long before the FSA forced them to do so.
The second factor is one of resource. Many of these small firms administer only a handful of Sipps, some less than 1,000. The income they make has to cover normal operating costs such as employing admin staff, rent, heating and phone bills.
But that income also has to cover The only poten-tial cost-cutting targets are IT and admin staff – the corner-stones of good quality servicefixed costs such as compliance and IT. The more Sipps you have, the more you can defray the expense of these fixed costs across more customers. That is not to say that the spend of small Sipp firms on IT and compliance is the same as big providers but it is probably a much greater proportion of their overall spend.
The financial crisis and recession have not helped. Aside from normal admin fees, another source of income for many small Sipp providers was the spread on bank account interest. Some operators were paying as little as 2 per cent or even 3 per cent under bank base rate. But when the base rate is 0.5 per cent, they cannot charge negative rates to maintain their margin on this money. So, small Sipp providers suffer two significant handicaps – lack of regulatory experience and lack of resource.
In April 2007, commentators from the already regulated world predicted that many small Sipp providers would choose not to continue post-regulation. In the event, many chose to soldier on as regulated firms but it was only a matter of time before the FSA turned the regulatory screw. With hindsight, the big firms knew what the small firms were about to experience, yet the small firms were blissfully unaware. Reality has now dawned.
If these small firms have to spend more money on compliance, then something has to give. The only potential cost-cutting targets are IT and admin staff – the cornerstones of good quality service.
Sipps are all about good service. To offer first-class service, you need to continually invest in robust IT systems and well trained administrators using well constructed and repeatable processes.
If you don’t have service, you are lost.
Business development manager, Dentons Pensions Mangement
In the wake of damning indictments from the FSA, these are hard times for small Sipp providers who might appear defenceless against criticisms of client mismanagement, unfair and irresponsible treatment and poor quality control standards.
But while it is easy to report these findings into misleading and sweepingly general headlines, a more nuanced examination of the small Sipp market reveals a different picture.
The timely and thorough FSA review of small Sipp providers reveals some worrying trends among a number of firms, namely a casual approach to accountability and transparency and inadequate systems of control and client management.
That the FSA have found such anomalies is alarming, especially in the context of an ever-expanding Small Sipp prov-iders continue to be the best vehicle for a dedicated service more in line with TCF than the big boysSipp market in which providers of all sizes are available with limited assurance of quality that might be provided by a thorough independent review system.
When it comes to the customer experience, it is certainly true that small Sipp providers continue to be the best vehicle for a more bespoke and dedicated service which is far more in line with TCF than the “big boys”, where clients are numbers. Indeed, it could be argued that the factory-style approach of bigger firms is far more susceptible to issues of transparency and unexpected hidden charges than in smaller client-facing firms.
Moreover, when it comes to flexibility in investment, small Sipp providers are far ahead of their bigger competitors who, restrained by policy decisions and the bureaucracy associated with their size, can only offer shorter and more inflexible investment lists. By comparison, a more agile management structure enables smaller Sipp providers to offer more bespoke individual investment solutions for their clients.
Instead of focusing on arbitrary divisons between small and large, what is needed is an approach to best practice that reflects the real issues across the Sipp market. Furthermore, big Sipp providers will not escape this review unscathed. Of the criticisms launched against small Sipp providers, many big firms are equally guilty and fall short of the standards of excellence outlined in the FSA good practice guidelines. Ultimately, if individual firms have problems, these must be addressed individually. There is no sense in condemning small Sipp providers for universally poor performance. Whitewash statements will achieve nothing in the pursuit of better quality and be misleading to the products selectors, be they the IFA market or direct client.