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The pieces start to fit

Sipps Suffolk Life director of sales and marketing John Moret says regulation could lead to a more coherent approach in the market

Another piece of the simplified pension jigsaw fell into place with the FSA’s publication of policy statement 06/7 dealing with the regulation of personal pension schemes including self-invested personal pensions.

It is not exactly easy reading, running to 156 pages including the text for the Perimeter Guidance manual.

The background to this document is that in last year’s pre-Budget statement, the Government said it was int-ending to amend the regula-tory framework for all personal pensions from April 2007. The Treasury had consulted with the industry on possible regimes for regulating Sipps.

This was against the backcloth of unrestricted investment freedom which was not forthcoming.

Given that the more esoteric and arguably riskier investments, such as residential property and tangible movable property, are no longer attractive as investments within a pension wrapper because of the tax implications, it is reasonable to argue whether this new regulatory regime is needed. I think there are three compelling reasons why it is needed.

l The pre-simplification regime imposed somewhat artificial restrictions on the type of organisation that could act as provider of a personal pension scheme including a Sipp.

Examples have been investment trust companies and private client stockbrokers, which could not act as providers in their own right. That also applied to financial advisers, leading to a growth in structures involving a third-party provider, often a bank. The legal and regulatory responsibilities behind such structures have often been far from clear.

Under the new regulatory framework, any organisation that is authorised by the FSA as an operator will be able to set up and run a Sipp. This seems a more sensible arrangement and may lead to the end of some of the more tenuous structures. It may also open up the market to new competition.

l Under the current regime, providers have differing regulatory status. A minority of Sipp providers are fully regulated and in the main this is life company providers.

Other providers operate in a variety of ways, sometimes mirroring some aspects of the FSA’s conduct of business rules but some have operated outside the ambit of regulation. The different approaches have not necessarily harmed the development of the market but have given rise to confusion in areas such as compensation arrangements and cancellation rights.

An example of the differing approaches has been in the area of reconciliation of client assets such as stock and cash. Depending on the regulatory regime adopted, the FSA imposes specific requirements on custodians for prompt reconciliation of client assets. Where assets are held, for example, with a discretionary investment manager as their nominee, the need for the provider to reconcile the Sipp assets separately depends on their regulatory status. With the advent of a new regulatory regime, it is to be hoped that a clearer and more consistent approach in this area will apply.

l With the accelerating growth in the Sipp market coinciding with far less distinction between the traditional personal pension and a Sipp, it was imperative that the FSA took action to protect consumers. But in adopting a packaged approach for Sipps, the FSA is in danger of creating a new area of inconsistency with its approach to wrap regulation.

After all, a Sipp is simply a group of assets within a tax wrapper.

The full impact of the new regulatory framework is yet to be felt. New and current Sipp operators have until April 5, 2007 to seek appropriate authorisation. There are signs that regulation will be a bridge too far for some.

The onus on the operator will be significant and, in most cases but not all, this will be the pension scheme administrator as defined in the Finance Act 2004.

The application process will lead to some providers concluding that their business does not have the resilience and scaleability to meet the FSA’s authorisation requirements.

The capital requirements of authorisation are also not insignificant, particularly as it appears that in most cases the Sipp operator will be deemed to be holding client money and will be subject to the higher expense-based requirement. When added to the other regulatory overheads, the initial and ongoing cost of regulation will be significant and may make operating a Sipp unviable.

This leads on to what happens to the existing business of Sipp providers that decide not to seek authorisation. It could fuel a spate of consolidations because any activity after April 2007 in relation to existing Sipp customers will potentially be a regulated activity.

The message for advisers, particularly those dealing with smaller unregulated providers, is they need to establish as soon as possible just what their intentions are to complying with the new regulatory framework.

They should also bear in mind that even if the provider says they intend to apply for authorisation, there is no guarantee that the FSA will approve their application.

I suspect this piece of the Sipp jigsaw may prove a little harder to accommodate than many believe.

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