Regulation of self-invested personal pensions looks set to change the shape of the market, particularly for smaller specialist firms.
From April 2007, the FSA will require all Sipp providers to be fully regulated. Currently, Sipp investments are regulated but providers are not.
Suffolk Life director of marketing John Moret says: “At the moment, the regulation of Sipps is a bit of a dog’s dinner. You have some providers like Suffolk Life that are fully regulated because we are a life company but I think the Sipp market has developed in an uncontrolled way so you have some companies that are totally unregulated and some that are sort of regulated for certain activities.
“It is a bit of a mess and I think, given the growth and interest in Sipps, it was inevitable that the FSA would have to do something.”
Standard life head of pension policy John Lawson believes the market will consolidate after regulation. He says small providers will feel the pinch because of the high cost of regulation.
He says: “A lot of small providers which might be looking after 300 or 400 Sipps will suffer the cost of the compliance process. With the cost of producing documents and holding capital, providers are asking themselves whether they really want to continue and a lot of the small ones will say no. For big companies, it is not such a big problem. We are used to treating Sipps as regulated business.”
Lawson says the various documents required by the regulator, such as the 20-page key features document, are costly to produce and capital adequacy will make many firms think twice about applying to stay in the market. He suggests that small to medium-sized companies may merge or be open to acquisition offers to create scale as a defence against high costs and increased paperwork.
But he adds: “The small guys might be prepared to buy each other but big companies are unlikely to buy small companies because their business is administered differently.”
However, Winterthur Life pensions strategy manager Mike Morrison says some big companies may decide the best way into the market is to buy a smaller company which is feeling the pressure.
Morrison says: “It will be interesting to see if there will be any new entrants to the market because, after regulation, anyone can be a Sipp provider.”
He suggests that technology companies and foreign firms may decide to enter the market by buying existing smaller operators.
It seems the move to consolidate has already begun with the news last week of JTL subsidiary Premier Pension Services’ acquisition of NPI Sipp from Pearl Group. The deal for NPI Sipp’s 300 policies looks like the first of several acquisitions for Premier Pension Services as it feels that now is a prime time to buy smaller companies which may be having problems in the prepar- ations for regulation.
Head of self-invested pensions Nigel Manley says smaller providers are likely to find the acquisition option enticing and Premier Pension Services is looking to acquire more Sipp providers in the run-up to regulation to secure a bigger slice of the post-regulation market.
Regulation is also starting to have an effect on the administration and support of Sipp providers as a number of banks are set to change their position or pull out of the market.
Cater Allen Pensions acts as the final provider and administrator for a number of Sipp companies but has decided not to apply to the FSA to remain a player in the market, claiming that companies will be better off being directly regulated.
Money Marketing understands that Bank of Scotland will also opt out of the Sipp market.
Lawson is not surprised. He says A-Day removed the requirement for Sipp providers to have a “capital P provider” such as Cater Allen Pensions or Bank of Scotland standing behind them. As a result, these companies, which initially got involved with Sipp providers to make margins from providing the bank accounts linked to clients’ Sipps, are choosing not to get involved in regulation and preferring to simply provide the banking process.
Manley says: “If they can do the banking without the regulatory responsibility, many are choosing that option. Being a provider got them into the market but should it now be the role of the trustee or the Sipp administrator?
“It will be interesting to see how the market reacts in the coming weeks once it becomes clear that big providers are pulling out. It can only be a matter of weeks before it starts to bubble to the surface. I would be surprised if other providers did not follow.”