Setting up shop as a self-invested personal pension (Sipp) provider is not that difficult. Despite being available since 1989, Sipps were not regulated until 2006. Regulation did little to raise the entry-level requirements of operators and it is thought that more than 170 Sipp providers are or have been in business since. FSA sales data suggests around two-thirds remain active and accept new business.
Repeated attempts by the regulator to nudge Sipp operators towards better practices appear to have been ignored by many. The findings of the thematic review of providers, published in October 2012, pulled no punches: the FSA said Sipp providers risk causing “significant consumer detriment” through a “failure to adequately control their business”. In highlighting a number of other systematic failures, the regulator felt that some providers in themselves were at risk of failure.
The FSA’s proposed solution – CP12/33, a new capital regime for Sipp operators – was published just a month later. Only days after the initial headlines died down, such as “£20,000 minimum capital requirement”, the industry realised that these proposals signalled the biggest ever shake-up of Sipps.
Before and after
Sipp operators can fall under different regulatory regimes, but in broad terms they are required to hold a minimum of capital equal to six weeks of business expenses. That amount should be sufficient to wind up the business and transfer out all plans and investments. Due to the fact that Sipps can hold a wide variety of investments, including some that are highly illiquid, the regulator has proposed to increase this minimum capital requirement and amend the calculation.
The proposed formula no longer takes business expenses into account and instead calculates capital requirements through two different formulae. Both take into account the value of the total assets under administration (AUA) and one reflects a capital premium for the amount of complex – or “non-standard” – assets held.
Table 1 demonstrates the financial change needed by a theoretical but typical Sipp operator with 2,000 plans.
A number of different scenarios can be modelled but the financial shock is clear. Using this example, the Sipp operator will need to find 942 per cent more capital just to keep running the same business it has always done.
The impact can be more clearly modelled on a smaller Sipp operator with just 500 plans. As shown in Chart 1, required capital could conceivably rise from just £41,000 to more than £1m. It appears unlikely that Dragons’ Den will see any pitches from Sipp operators in coming years.
Market impact
The immediate impact for Sipp providers is clear: more money in the bank is needed to continue operating. But that’s not all. The FSA’s thematic review also puts pressure on operators to introduce the necessary systems, controls and processes to bring their business up to a more acceptable level. These additional costs seem likely to force some Sipp operators to close. During 2012 a handful of high-profile acquisitions made the headlines, a trend looking set to accelerate in 2013.
Advisers will still need to undertake due diligence on their chosen Sipp providers – there are still too many smaller firms for the requirement for in-depth analysis to lessen. But over the short to medium term advisers will soon see the benefits. Choice of providers will inevitably be reduced but choice of features, flexibility and access to investments will hopefully not. Access to some of the more esoteric unregulated schemes may reduce, however, as the wider Sipp market considers whether they represent good, sustainable business.
