Regulation is a two-edged sword. It kills off many sharp practices that arise in unregulated markets but it can also take a swipe at those operating perfectly legitimately by imposing significant extra admin burdens on them. That is why regulation is often seen by IFAs as a curse rather than a blessing. However, the regulation of Sipps from April will bring positive benefits for IFAs and should be welcomed.
First of all, regulation will bring greater security to clients investing in Sipps. For example, there will be new rights for clients to complain to the Financial Ombudsman Service and to make claims on the Financial Services Compensation Scheme if the firm collapses.
Underpinning these rights are controls to ensure that Sipp providers are robust, well managed companies. For example, firms holding client money or assets must also hold capital equivalent to three months’ expenditure. While this will present a considerable challenge for smaller operators, it should give added confidence in the stability of Sipp providers.
If you are placing business over the next month or two, it would be worth checking with the provider that it has applied for authorisation and is confident that it can meet the capital-adequacy requirements.
A second benefit of regulation is that the true cost of Sipp investment will become much more transparent. Bringing disclosure rules into line with insured personal pensions will mean that, for the first time, it will be relatively straightforward to compare overall charges and assess which Sipps really do provide good value. The effect could be dramatic for some companies which appear to have low headline charges but which turn out to be much more expensive when you add in set-up charges, transaction charges, expenses and VAT.
The rules will also force Sipp providers to consider how they present the cost of underlying investments.
Similarly, for discretionary investment managers, the headline charge is only part of the total cost to the client.
Fair treatment of customers should also extend to clarity in the cost of money held on deposit, which can be fairly substantial in many Sipps. The rate of interest varies widely across the market and some companies add interest at or close to bank base rate while others make a significant turn on cash investments. If the Sipp provider is gaining extra income from cash deposits, this should be clear to clients and a factor in deciding which company to use.
Of course, disclosure of charges could mean that many Sipps look considerably more expensive than at present but even that should be welcomed by IFAs.
It is much better that clients know the cost of investing from the start rather than finding out at a later stage when they may blame you for not making it clear. It will help you and your clients to choose the best option based on a realistic comparison of costs as well as service and investment flexibility.
A third benefit of regulation is that it will introduce general consistency in the information given to your clients by different Sipp providers, bringing it up to the standard of packaged personal pensions. This will make it much easier to compare products.
Regulation will present significant challenges to many Sipp providers although others will already meet the new standards before they become compulsory – generally in April, but with a transition period until November for disclosure. There will also be challenges for IFAs in adapting to the new regime, which includes much more transparency of commission payments. However, it should help rather than hinder the sale of Sipp business.
Clearer and better structured information, more transparent and comparable charges, stronger controls on providers and increased consumer rights can only increase confidence in the Sipp market and ensure it continue growing strongly.
Ian Naismith is head of pensions market develop-ment at Scottish Widows.