The increase in Sipp numbers has been well chronicled in recent years, with a particular acceleration in growth apparent from around 2007. It was from this period that Sipps fell under the regulatory scrutiny of what was then the FSA. Less well chronicled is the growth in the number of Sipp providers, which also rose appreciably from this date.
Prior to 2007, the operation of Sipps was restricted to regulated firms such as banks, building societies and insurance companies. However, with Sipp regulation came the opening of doors to enable those that could persuade the regulator they were competent to do so to establish, operate and wind up Sipps.
Regulator returns suggest that there are around 110 Sipp providers in existence open to new business. Clearly the regulatory burden for the new regulator, the FCA, is great; keeping track of and on top of this number of providers will stretch its limited resources.
Coupled with some less than favourable press reports of failed assets accepted into some Sipp portfolios, the regulator has had to react, first commissioning thematic reviews of providers’ processes and systems in place for assessing and accepting assets, and secondly a review of the capital adequacy requirements, which it felt were inadequate should a Sipp provider need to wind up their book in an orderly manner.
Trigger for consolidation?
The regulator has made it clear that the actions of some providers have been below the standard it expects and even those that previously ran a clean and tidy ship will have reviewed their asset acceptance procedures. Even where these were found to be in order, the documentation necessary to evidence that the processes are being correctly followed results in additional cost.
The new illustration requirements, now necessary for all new business, have also required capital investment into new software and processes to ensure these new rules can be met. Further requirements now also necessitate the disclosure of income derived from non-fee sources, such as interest rate trail, which in turn has led to some firms re-evaluating their business models and charging methods.
With costs increasing, some firms for whom Sipp operation is not core to their business will assess whether it is a market in which it is viable for them to continue to operate.
But perhaps the biggest driver towards consolidation in the market will be the new capital adequacy requirements. While full details of the new proposals have yet to be released, the impact on most Sipp providers could be great. Figures produced by the Association of Member-directed Pension Schemes (Amps) suggest many providers’ capital requirements will increase by around eight times.
For all but the very strong providers, additional capital will be required and this can be found through only a limited number of alternatives. For those owned by larger financial institutions, capital can probably be found from existing resources. For independent providers, raising capital would be from existing shareholder funds or, where insufficient, from external sources. For some, a requirement to increase fees will be inevitable.
For a few the exercise will be a journey too far and thus businesses are currently evaluating ongoing viability, with some already having waved the white flag and some notable acquisitions already having taken place.
