The more sophisticated approach, as suggested by Peter Smith, of linking reserves to the individual risk profile of each firm is already up and running for insurers, banks and some other firms who have to complete an individual capital adequacy assessment (ICA). These involve detailed modelling of different categories of risk so that appropriate reserves can be calculated for each risk. Those individual (internal) assessments are then compared with a formulaic calculation and may be supplemented with a further capital assessment required by the FSA based on the risk characteristics of the firm.
This would be both costly and time consuming for each individual SIPP provider to analyse, document and model its own risk profile, but it would mean that providers would have to implement more systems and mechanisms to capture, analyse and evaluate their risks, which would certainly help to alleviate the FSA’s concerns about inadequate systems and controls.
Whichever approach is adopted, the implications for providers will be profound. And this is at a time when providers are contending with significant commercial and marketplace challenges alongside other regulatory demands emanating from both the FSA and HMRC
The commercial challenges are wide ranging, from the unexpected Financial Services Compensation Scheme (FSCS) levy a year ago, through to tough competition and erosion of the bespoke SIPP market by streamlined, lower cost products. Even the abolition of protected rights in April - which will simplify things long term - will create a lot of extra work in the short term with updating illustrations, forms, key feature documents, rules and other literature, as well as system changes. And for providers that hold protected rights in separate plans with separate fees, there will be pressure from clients to merge their plans, thereby reducing overall fees.
At the same time, there is a continuing flow of other mandatory changes, particularly impacting illustrations, arising from RDR, statutory money purchase illustration rules and unisex annuities and drawdown changes arising from the Test Achats European Court judgement.
Ringing in the changes
As this impending increased cost of regulation coupled with the sometimes murky view over what investments some SIPP providers hold becomes ever more clear, signs are emerging that SIPP providers may not find it as easy to raise funds or sell as they might have thought 12 months ago. SIPPs in 2011 will be remembered for many things, including the introduction of capped and flexible drawdown. It will also go down as a year when several SIPP providers of significant size failed to attract either a buyer or external investment in their business. The risks of operating a SIPP business have suddenly and measurably increased.
One group of people who will be paying particularly close attention will be the shareholders of SIPP firms facing the prospect of making further substantial investments into a firm operating in an increasingly difficult marketplace.
