Standard Life’s decision that its Sipp will no longer allow members to borrow money to buy commercial property seems to confirm a trend I had already noticed in the Sipp market.
Standard says the state of the property market is the cause of the decision. But Sipp regulations limit any loan to 50 per cent of the net fund value and if Standard life does not think banks are alive to the risks of default, then it shows they have not been active in the market. To quit just as the economic recovery does finally seem to be gathering pace does not seem down to property market risk alone.
I believe it is representative of a trend in the Sipp market that has been going on for years and is accelerating now, given market and regulation changes. I have previously said that I believe that there are three types of Sipp, the three Fs:
- The “fake” Sipp – many life offices used the Sipp badge as a marketing and commission improving change to what was just their personal pension with a few added external options that were rarely used.
- The “funds” Sipp – the largest and fastest-growing sector is Sipps used to break the link with provider funds and via a platform access the wider range of funds and quoted shares.
- The “full” Sipp – the bespoke full Sipp is the area that requires the highest technical and administrative input from the provider; to allow investment in property, unquoted investments, etc, cannot be easily administered via systems and are reliant on knowledgeable staff.
For a large provider, the majority of their cases and income come from the fund Sipp sector and the income on their Sipp book is often mostly derived from their share of interest on the Sipp bank account and from the funds held rather than any direct fees.
Therefore, their focus on these areas is reasonable as their scale and systems can be used to take margin from these transactions.
Over the last few years, I have had a number of calls from other IFAs as we were running our own small full Sipp. These calls were all of a similar nature, a large Sipp provider with which they had a long relationship was suddenly not willing to deal with a case that was slightly different but not by any means unreasonable. One IFA looking to help a client buy a shop with a flat above had phoned the head of a large Sipp provider to ask why they were turning the case away. He was told that, given the volume of business the provider had from simple cases, they had no appetite for anything complex.
This was the position a few years ago before the FSA suggested changes to the capital adequacy for Sipp providers. Like many ideas from regulators, from a headline point of view, this can sound very reasonable. Of course, Sipp providers should have sufficient capital so they do not fail or if they do fail, as a few have, to ensure they can easily be dealt with.
There were, however, many flaws in the original proposals made by the regulator, some of which have already started to affect the market.
Given a Sipp provider is not responsible for the suitability of the Sipp or the investments within it, the capital is required to ensure the process of transferring to a new provider can be paid for.
Although as every Sipp provider can take fees from the Sipp accounts and investments it hold this requirement has never been used in the past as a new provider knows it can be paid.
There were three aspects of the proposed regime that caused potential market issues:
- Assets were proposed to be split into two groups – standard (funds, quoted shares, cash) and non-standard (property, unquoted investments, loans, etc). While there are arguments over which investments fall into which group and why they may take longer to administer a change of ownership, it is clear that fund Sipps are likely to require much less capital.
- The formula suggested by the regulator required greater capital for a larger asset value. This was an area that the feedback to the regulator pointed out as flawed as it costs no more to transfer the ownership of £1m property than a £100,000 property and having capital adequacy requirements moving up and down with the market value makes little sense. If your charges were based on a percentage of assets value you were somewhat insulated from this.
- Finally, and very controversially, the formula had proportionally a lower requirement for larger providers than smaller.
Taken together, if you were designing a Sipp to be least affected by the proposals, you would be looking at a funds-only Sipp charging a percentage of assets basis from a large provider.
Given the regulatory pressures already on smaller Sipp providers, the proposed changes to the capital regime did make many providers start to consider their future.
For the adviser, however, this creates real issues.
If you have a client with a need for a full Sipp, not necessarily for anything too exotic but possibly buying an industrial-type property with a loan and wanting to use their own solicitor, then the biggest Sipp providers may simply not be interested or may have raised their fees unacceptably high.
Using a small bespoke provider could give the client everything they need at a good price but concern over the future of the provider makes recommending smaller firms a potential issue.
Having had our own small Sipp provider business, the CTTP Sipp, but also being very much part of the adviser community, I could see both the threat and opportunity of the market for Sipps.
I still very much believe there is a very important market for real Sipps and SSASs and this is has a natural affinity with IFAs.
The market changes, however, mean that large providers will be withdrawing from this area in practical terms and some smaller Sipp providers will be exiting or being effectively excluded from the market until the FCA finalises and implements the new capital regime.
For the next couple of years, as we wait for the FCA to decide how it will change the capital adequacy rules and for any regulatory changes from the thematic review of the Sipp market which started just before Christmas, advisers will have a difficult job.
Most large providers will say they fully support providing full Sipps, probably right up to the day some of them exit the market, something which some of them are definitely considering.
All the smaller, bespoke providers will say they have no capital adequacy or compliance worries, even though many of them will.
Conducting due diligence to both meet regulatory requirements and more importantly to keep client confidence is going to be a challenge.
Advisers are good at stepping up to challenges, however, and I hope they will not steer away from full Sipp business but continue to help clients who can really benefit from this area.
Business owners or professionals that can secure there business a premises tax efficiently through pension property or can expand their business via a SSAS loanback will be excellent grateful clients who can become great advocates for IFAs.
Ian Smith is director of Central Financial Planning Limited