I have been told that the FSA has written to the Association of Member Directed Pension Schemes to encourage its members to get on with their Sipp authorisation applications for regulation.
The FSA is concerned that with well over 100 Sipp providers in the market, they will have an enormous workload to process all the application forms by the April 6 deadline.
Why are firms leaving it late to apply?
I suspect that late submissions are not borne out of apathy but an explanation of the evolution of the Sipp market may provide the reason for the delay.
Over the years, I have encountered many challenges in the financial services sector but none bears comparison with the challenge of establishing and operating in the Sipp environment. It takes an incredible degree of expertise, patience and foresight to ensure that a Sipp operation is run efficiently and continues to run that way.
A Sipp is very different from other forms of pension scheme. Sipps are highly transactional. The mature operation evolves into a high-volume and complex environment.
No matter how routine an operator tries to make a procedure, it will always be compromised by the bespoke nature of the concept.
This is a self-select open architecture investment vehicle and clients and advisers demand maximum flexibility within the HM Revenue and Customs’ rules and acceptable levels of service for their clients.
Operators are often forced to compromise on efficiency, to satisfy the service requirements of the client and the adviser and although these service requirements are logical and reasonable to the client, to the operator they can prove exceptionally costly in terms of both risk and margins.
You will always have a certain amount of push sand pull between the service provider and the client.
For the Sipp operator, the result of this individual bespoking is a back-office process driven by the nuances of the market, generating constant change that is unrealistic if not impossible to automate. Therefore most of the existing Sipp providers will have built up very intricate legacy books, all with their own unique features, risks and issues.
In addition, many Sipp operators will be outsourcing to third parties after regulation and these third parties will need to ensure their processes and systems are compliant under the new regime and able to cope with these intricate legacy issues. A submission cannot be made without this confidence.
Another factor to consider, is that some Sipp practitioners, particularly those that have structured the legal framework of their schemes to provide joint trusteeship with the member have relied on external accountants and the member trustees to keep accurate primary records of the Sipp accounts.
This is quite common within an Ssas scheme and some smaller Sipp providers have evolved from Ssas practitioners. This less hands-on or reactive approach to record-keeping will be unacceptable in a regulated environment.
To keep full accounting records within the operation will inevitably add to the cost of Sipp provision as the accumulation of accurate legacy information from external accountants and member trustees can be time-consuming but this will be essential before applying for authorisation.
In addition, new investment administration processes and systems will need to be developed and tested before any FSA application can be made.
Finally, the delay in submissions could in part be due to many Sipp operators hoping for further clarity on whether they will be made subject to the FSA’s client money and custodianship rules.
This could be key to the submission because processes will be substantially affected by the FSA’s decision on this.
Many Sipp operators could be forced to restrict asset choice and indeed could require existing clients to sell certain assets, particularly if these assets are difficult to administer within the FSA’s stringent rules.
Having worked in both a client money and a non-client money operation, I am sure that many of the existing Sipp operators will find it very difficult to work within the constraints of a client money and custodianship regime due to the unique investment flexibility of the Sipp vehicle.
In the Sipp environment, the trustee is the legal owner of the assets and, as such, the trustee relies on third-party banks and investment providers to safeguard their cash and assets and supply them as legal owner with information.
Unfortunately, some investment houses and insurance companies have non-automated data which affects the service levels of the Sipp operator and the timeliness of the service delivery to the client.
The client and the adviser (and not the Sipp operator) are responsible for the choice of investment house and this creates a dilemma.
The client’s expectations need to be managed accordingly. An investment house may have first-class investment performance but poor admin or vice versa.
Surely, it is up to the client and the adviser to decide whether the service levels are acceptable bearing in mind the investment performance.
The Sipp operator is often caught in the middle. The aim should be to give the client and adviser the maximum investment flexibility with an acceptable service provision and this service provision communicated and agreed with the client in advance of making the investment decision.
With so many variables to consider, the prospect of re-engineering legacy Sipp portfolios into the FSA’s new authorisation requirements seems daunting and may be the reason behind a very hesitant industry.