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Stranded: Clients at risk as walls close in on Sipp providers


Sipp clients’ savings are under threat from a “double whammy” as potential consolidators pull out of the market and capital adequacy rules hit administrators.

Last week, Suffolk Life announced it would no longer be pursuing acquisitions because it is too difficult to weed out “unacceptable assets”.

Firms still actively looking to acquire Sipp books warn savers could face huge penalties unless the Government gives administrators extra protection akin to those afforded in pension liberation cases.

A Money Marketing Freedom of Information request also reveals that nine Sipp operators failed to meet the current capital adequacy requirements, ahead of the new regime taking effect in 2016.

So will savers be caught by a failing market, or will providers swoop for back-books when firms are forced into fire sales?

Unacceptable assets

Suffolk Life says its exit from the consolidation market was due to its inability to determine exactly what assets were held within Sipps.

The firm has made four acquisitions of Sipp back-books over the last three years but found targets could not be adequately assessed. Strategic partnership director Chris Jones, who led the acquisition business, has decided to exit the company following the decision to focus on organic growth.

Head of marketing Greg Kingston says: “Our position has arrived through frustration. There just isn’t the market out there we thought there was in the first place. Some of the experiences we’ve had of our successful acquisitions have been less than satisfactory.

“After due diligence you discover that once you start to transfer, a whole host of assets start to appear that were not documented. Sometimes that can be assets that we do not want, or even that we don’t think are allowed within pensions at all.”

Money Marketing understands Suffolk Life’s 2012 acquisition of Pointon York was one such problematic deal. Industry insiders say the decision to stop acquisitions is driven more by the firm’s parent, Legal and General, favouring the platform Sipp market.

Kingston says: “We’re probably more diverse than people realise. Between 20 and 25 per cent of our book is administering platform pensions for Cofunds and others.

“While the bespoke Sipp market starts to dry up in growth – with a few notable exceptions such as commercial property – we’ve got really strong growth through our link with Cofunds.”

Talbot and Muir head of technical support Claire Trott shares Suffolk Life’s concerns. She says: “We are still actively looking for suitable Sipp and SSAS books to take on in the future but do not want to put our other clients at risk by taking on a mess from someone else that could jeopardise our service.”

HMRC intervention

Consolidators Mattioli Woods and Curtis Banks both confirm their continued commitment to acquiring back-books, but Mattioli Woods operations director Mark Smith says HMRC needs to intervene.

Smith says some small bespoke Sipp providers face a “double whammy” of increased capital requirements and falling cash flow as non-standard assets become too expensive to hold.

He says there is a real chance of providers “falling over”, potentially leaving members at risk of a 40 per cent tax charge if HMRC deregisters the pension scheme.

To protect members, he argues HMRC should promise to limit the tax liability on administrators who step in, as is the case with occupational schemes where The Pensions Regulator has appointed firms to intervene.

Smith says: “We’ve spoken to HMRC before about how the dangers of those liabilities flowing to a new scheme administrator are very real. In occupational schemes, The Pensions Regulator has said if an administrator is appointed to a scheme as a result of regulatory intervention, the tax liabilities are not held by the new party, but they are with Sipps.

“If HMRC could look at doing something similar that would really assist with some of the issues because no-one’s going to pick up books if they think liabilities will flow through to them.”

Last chance saloon

There is growing evidence Sipp providers could be on the brink of collapse.

Last summer the FCA publishes its third thematic review of Sipp operators and wrote to the chief executives of all providers. The regulator said it found “widespread” failings within the sector.

Now a Money Marketing Freedom of Information request reveals the extent of the regulator’s findings.

The review covered 97 Sipp providers, of which 13 operators agreed to make changes to the types of investment permitted and 22 agreed to make changes to the controls on the investments they allow.

In addition, nine providers – 10 per cent of those in the scope of the review – failed to meet the capital adequacy requirements in place at the time.

The regulator says 177 firms have the permissions required to be a Sipp operator, of which 174 are believed to be open to new business. But the FCA admits it does not have a record of the number of active or live Sipp investors.

Kingston says: “The implication is that those nine firms that failed capital adequacy rules in 2014, have no chance of passing the new requirements in 2016. That’s quite shocking.

“The fact that the FCA doesn’t have a record of the number of active Sipp investors makes me question whether the regulator understands the full size of the Sipp market.

“It probably is the 80/20 rule – where the majority of business is with the firms they are aware of – but that still leaves a lot of consumers in firms they have no understanding of.”

Adviser view

Stefan Fura, director, Furnley House

The exit of Suffolk Life from the acquisition market brings into focus the importance of the due diligence process. You have to be responsible and ensure you’re looking under the bonnet because cost isn’t everything, sustainability is also important. Brings an extra layer of requirements for advisers but reinforces the benefits of taking advice, we’re well placed to help clients navigate what could be a bit of minefield.

Expert view

The news that Suffolk Life has stopped actively seeking new acquisitions of books of Sipp business is in itself not a huge surprise. The reason it gives for the move should not be either – concerns about the quality of the business available.

There are very few examples of a book of Sipp business being sold and the acquirer then demonstrating that it has been able to run the new book profitably. In 2004 Capita acquired over 20,000 Sipps – the old PPML business – and within 10 years announced it was closing its Sipp operation. And of course Suffolk Life was itself acquired by Legal & General in 2008 at what most commentators saw as a pre-recession premium price.

There have also been a series of smaller “deals” over the last few years with Curtis Banks and Mattioli Woods being the two main protagonists. James Hay have also showed their hand with the purchase of the remnants of the PPML book from Capita and more recently the acquisition of the Towry Law book. Add Dentons and Xafinity and you have just about exhausted the list of companies apparently with an appetite for acquisition.

Consolidating Sipp books can be fraught with problems. Apart from the obvious risks associated with toxic assets – deep dive due diligence is essential with these deals – there are all the other risks common with acquisitions. Incompatible operating systems can often be a barrier – moving Sipps between platforms or in some cases inheriting paper files can drain resource and increase costs.

Often a lot of the “value” of businesses resides with the knowledge of the key people, particularly with smaller Sipp businesses that have specialised in certain areas, such as commercial property. Securing those people as part of the deal process can be key – and expensive – and clearly the location of the vendor’s business can be a big factor in cost containment.

There continues to be a lot of talk of further consolidation in the run up to the new capital requirements for Sipp operators that kick in next year. The FCA’s recent clarification on some of the detail of these requirements is welcome but it doesn’t get away from the fact that some Sipp businesses simply won’t be able to raise the capital necessary. That could spark a further wave of consolidation activity but with limited demand it looks to be a buyers market.

Sipps have always had a reputation for being “sticky” – a Sipp is for life in most cases, particularly following the new retirement freedoms. That means that valuing Sipp books is akin to valuing an annuity stream of fee income – discounted by the degree of risk. And there lies the issue.

The jury is out on whether a strategy built around acquiring books of Sipp business will prove more profitable and sustainable than organic growth. That’s why it’s possible the Suffolk Life move is sensible. Too many advisers and clients have seen service levels drop off alarmingly after a Sipp business has been acquired. That reputational damage is probably the biggest risk of all.

John Moret is principal at MoretoSIPPs



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There are 5 comments at the moment, we would love to hear your opinion too.

  1. All the turmoil in the SIPP market highlighted in the article and comments was a predictable outcome of the FCA’s unfit-for-purpose changes to their SIPP capital requirement rules. The FCA has made, and continues to make, (at least) two fundamental errors in its attempts to regulate the SIPP market. First, it has tried to improve standards and encourage consolidation via the relatively easy ‘back door’ of capital requirements rather than by the harder approach of addressing the core issues head-on. Second, it fails to differentiate between ‘real’, or ‘bespoke’, SIPPs on the one hand and platform SIPPs on the other hand – they are totally different products but are regulated by the FCA in exactly the same way. For these reasons, the responsibility for the chaotic situation described in the article can be laid squarely on the FCA.

    The FCA were warned of this chaotic outcome in many of the responses to their consultation on the new capital requirements but, in a classic example of tunnel vision, chose to dismiss all the well-argued criticisms of their approach.

  2. Douglas Brodie 12th June 2015 at 2:19 pm

    The regulator has a perpetual inference that balance sheet = security. Perhaps that’s why Mr Sants got a knighthood, never mind that 2008 proved unequivocably that such a premise is simply false. the evidence disproves the argument.

    If the problem the regualtor is trying to fix via Cap Ad is security of client monies in case of provider collapse, then the balance sheet of the provider is of no consequence. It is the financial position of the trustee and the custodian that bring security or risk to client assets, not the administrator – the latter’s relationship should be such that it can be replaced when needed, either due to financial collapse or for any other reason the trustee wishes to use.

    The trustee.
    The trustee’s position is defined in law in the various Acts, and is the legal owner of the assets. The regulator has permitted the fiscal and financial responsibility of the trustee to be ignored, and for the administrator to take control, and thus import direct risk to client assets. The provider/administrator should be no more than the engine on the car – vital for the product’s good health, but replaceable. The trustee’s fiduciary responsibility is to ensure the rights and interests of the beneficiary are protected – by default that must include the potential to fire the administrator.

    Where the trustee is actually owned by the provider/administrator it must surely be only a matter of time until a case is brought that settles trustee liability once and for all, and calls the trustee into account. In doing so, the sham of trustee-ship hiding behind the guise of a ‘corporate trustee’ must be addressed – in cases of trustee failure the company simply collapses and it can be see, de facto, that the benficiaries have in fact no protection whatsoever.

    Further, where the trustee is owned by the provider, how can it be determined that there is no conflict of interest? That the trustee is acting on the benficiaries behalf alone? That the trustee is able to demonstrate ability to take action against the provider?

    If the client capital is at risk from failure of the provider/administrator then the trustee is not doing its job, and is liable. This position is not permitted with the occupational regime and TPR are quite simply the best equipped, most competent body to regulate SIPPs – quite why they continue to be sidelined is a mystery.

  3. Douglas,

    Perhaps surprisingly, the position of “trustee” is hardly defined in any Act at all, certainly if we are talking about trustees of SIPPs. Yes, there are FCA’s requirements, but they are not imposed by virtue of being a trustee as such.

    In all the trust-based SIPPs I’m aware of, the “provider” or “operator” is, on a correct application of trust law, the trustee of the scheme, as it has the powers under the scheme’s governing provisions to run the scheme: to decide who to admit as members, what contributions to accept, what range of investments to allow, what investment managers banks etc to facilitate relationships with, what forms of benefit to allow, when to permit transfers, when to wind up, etc.

    FCA has not ignored this. Its definition of “operator”, as the person responsible to the members of the scheme for its administration and management, is pretty much appropriate. The definition has to be workable for both contract based and trust based schemes. It has been widely accepted since 2007 that the only practical basis for running a trust-based SIPP is to have the same entity acting as trustee (i.e. having the key powers under scheme rules) and as operator for FCA purposes and as scheme administrator for HMRC purposes.

    Some schemes do have a 2nd party acting across the scheme as a whole, often named as an “asset trustee” or “bare trustee”, whose role is to hold title to assets and to apply them as the provider/operator directs (which may in turn be as the member directs, in a scheme where members are promised control of investment decisions). They are not trustees in the sense you are thinking of. They have no “free will”, they are little different to a stockbroker’s nominee and the question of a conflict of interest with the provider/operator does not arise.

    The Pensions Ombudsman, who seems to have a far better understanding of trust law and trustee duties than FOS/FCA while being quite willing to step in and protect members from injustice, has not had any trouble understanding and accepting this allocation of roles.

  4. So many SIPPs were set up outside of regulation then failed to appreciate their responsibilities as regulation began to bite. Often a SIPP was seen as a panacea for any asset to be included whether or not it was acceptable as a pension asset, which was often never even considered. A lot of SIPPs have required considerable work to bring them into line with FCA rules and pension legislation.

    The capital requirements should not be that onerous for any well organised and decent provider to meet but there is a real challenge for the industry to get its act together.

  5. Douglas Brodie 15th June 2015 at 3:05 pm

    “It has been widely accepted since 2007 that the only practical basis for running a trust-based SIPP is to have the same entity acting as trustee “.
    Therein lies the problem. The position of trustee has simply been ignored. If the position of trustee and operator are amalgamated, then the trustee necessarily invites conflict of interest into its role. Given it is the trustee that holds the powers of delegation, if it does not have the power to revoke any such delegation then it has lost fiduciary control. Hello Mr. Maxwell, I think we’ve been here before.

    The PO limits its role in personal pensions, and you will rarely see it act in that arean other than in matters of pension payments. TPR is much sharper on pension trustee issues, but it is limited to occupational schemes. It does, though, helpfully publish trustee responsibilities, limitations, liabilities and guidelines on its website.

    Part II to IV of the trustee act are exempted specifically fot trustees of unit trusts. If pension trustees were intended to be included they would have been. At no stage have I seen any authoritative suggestion that SIPP trustees are exempted from any standard trustee responsibilities, the latter being the framework used by TPR. Rather, I suggest, this is simply a significant fudge, permitted by the FSA in 2006, and perpetuated by SIPP operators ever since. Just because the situation ‘is’, does not mean mean it ‘should be’.

    It is the trustees who are bound by the Act 2000, s 4 a and b apply. In terms of the recent SIPP failures which have precipitated the cap ad issue, I suggest that the originating investment issues as covered quite simply by those sub-sections. If the legislation did not apply to pension trustees, that part would simply be redundant. Given that government has taken the time to debate and construct such legislation it would be both arrogant and foolhardy of a provider to attempt to redefine its meaning, irrespective of how successfully it may be able to pull the wool over a regulator’s eyes… the past.

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