Many Sipp providers have felt a little gloomy of late. In December the regulator scolded Sipp providers before announcing tough new capital adequacy requirements.
But the changes proposed by the Financial Services Authority (FSA) are in fact very sensible and likely to benefit advisers.
When the FSA issued its capital adequacy paper (CP12/33) in November 2012, it was a response to a number of problems it said had been mounting among what it described as ‘small Sipp providers’.
Those included poor controls and record-keeping as well as a growing fear that Sipps were being used as vehicles to sell toxic investments.
The FSA concluded some Sipp providers will go bust, resulting in ‘significantly increased risk of harm to consumers’.
Therefore, the regulator will require Sipp providers to keep greater capital reserves, not relative to their expenditure, as is the case with many other firms, but relative to the size and riskiness of the investments the Sipp provider holds.
The effect of increased requirements
Many Sipp providers believe this is unfair. The hike impacts independent Sipp providers, as insured Sipps are not affected.
It also penalises commercial property holdings, which are listed as ‘non-standard’ assets alongside unregulated collective investment schemes. This is because the definition of ‘non-standard’ has more to do with liquidity than risk.
The likely outcome is that from 2014, Sipp providers will need to find vastly increased capital reserves just to continue operating their businesses. A firm that holds £50,000 capital today could be asked to hold over £1 million instead by 2014.
Should the proposals be implemented, a likely outcome is that some Sipp operators will not be able to continue. This will drive consolidation, reducing choice and diversity in the market.
If smaller Sipp providers disappear, or are bought up, the market will gravitate towards larger providers.
However, it is right to question whether a small Sipp provider should be taking on investments that cannot be easily liquidised in the event of a wind-up.
Some of the larger Sipp providers also operate platforms, some offer investments and advice, and some even have direct-to-consumer business models. It is not what is being lost but what is emerging that should be occupying advisers’ minds right now.
Greg Kingston is head of marketing at Suffolk Life.