The FSA announced the week before the big day that it had received 135 applications for authorisation, including 64 new applications and 71 applications from firms already regulated for other activities.
This put to rest persistent concerns raised in previous months that the FSA had received only a handful of applications and that a wave of casualties would fall at the first hurdle. It seems, as with homework or tax returns, Sipp authorisation applications are equally prone to being left to the last minute.
Suffolk Life director of sales and marketing John Moret estimates this leaves only 15-20 Sipp firms that have not applied for permission but he believes there will be a second wave of casualties further down the line as firms, particularly smaller providers, buckle under the pressure of ongoing compliance costs and unforeseen regulatory requirements.
Hargreaves Lansdown head of research Tom McPhail says that while only a handful of Sipp firms will hang up their boots in the short term, there will be fallout in the longer term through a combination of consolidation and firms dropping out of the market.
He says some bigger firms will be wary of taking on potentially nasty legacy issues through acquisition and will prefer to snap up orphaned Sipp business.
McPhail says: “Sipp regulation will shake the tree and many will be tempted to stand beneath the tree to wait for the fruit to fall.”
This strategy could certainly pay off, says Pal Partners business development director Richard Mattison. He says the combination of an escalating price war in the Sipp market and increased compliance costs will push some firms to tipping point.
He says: “Sipp costs have gone down to the point that they are unsustainable. The current price war is putting so much stress on firms that the regulatory burden could push them over the edge. The larger firms will be looking to benefit from this but I think there could even be a major casualty among the big players.”
But apart from an inevitable degree of fallout and consolidation, how else could Sipp regulation affect the market?
The week before the big day, the FSA fired a couple of warning shots across the industry’s bows, highlighting its concerns about a significant number of Sipp financial promotions and warning it will carry out thematic work on Sipp advice if it sees problems developing in this area.
The regulator also noted concerns raised in the media that some Sipp sales have been driven by high rates of commission and that some consumers have been advised to take out Sipps when they would be better suited to cheaper stakeholder or personal pensions.
It added: “We require firms to treat their customers fairly. Advice to switch into Sipps should be suitable – reflecting the customers needs, priorities and circumstances – and not influenced by commission payments.”
Of course, treating customers fairly, not being swayed by commission and abiding by pension transfer rules are not new principles for advisers being ushered in by Sipp regulation.
But there is little doubt that the new statutory regime has thrown the spotlight on sales of Sipps and that the boom in Sipp sales has not gone unnoticed by the FSA.
Winterthur Life pensions strategy manager Mike Morrison points out that the FSA highlighted concerns over Sipp suitability back in February last year.
Morrison says it is going to be very important that customers and IFAs look at how much flexibility they need now compared with how much flexibility they will need in the future.
It will also be crucial to weigh up whether it will be more beneficial for customers who may anticipate needing more investment choice in the future going into a personal pension and then transferring into a Sipp product when necessary rather than going straight into a basic Sipp.
Hornbuckle Mitchell director David White says most of the firm’s Sipps have an element of self-investment or have a diversified portfolio. But he says the FSA’s concerns that some customers are being pushed into higher-charging Sipps are not entirely unjustified.
He predicts there could be a review of pension transfers from personal pensions to Sipps if the regulator finds evidence of anything untoward.
But Mattison says: “All this talk about Sipps being inappropriate is garbage. How dare people say that? There are plenty of Sipps out there that are cheap, have massive investment choice and are well run. Sipps are a mass-market product and have overtaken the traditional PP. This kind of talk is just sour grapes from life offices that have not made inroads in the Sipp market.”
McPhail says one of the key benefits of Sipp regulation will be the ability of customers to compare charges of Sipps and PPs. This increased transparency, he argues, should lay to rest some of the concerns about people being unwittingly pushed into products plagued with hidden charges.
He says one of the potential effects of Sipp regulation will be to alert HM Revenue & Customs to the increasingly widespread practice of Sipp providers paying IFAs by taking money directly out of the customer’s pension pot.
“It is difficult to think the Revenue will be happy with the idea of effectively giving tax relief, meant to boost people’s pensions pots, to pay IFAs,” he says.
Returning to the FSA’s concerns about commission-based sales of Sipps and Sipp suitability, it will be interesting to see whether regulation will dampen or further stimulate the booming Sipp market.
Some commentators believe the new regime will have only a negligible effect but McPhail argues that sales could even increase as a result of regulation as Sipps are finally brought firmly into the mainstream.