An underlying weakness in the Sipp market may have severe implications for a number of providers, both large and small.
Now more than ever, advisers must conduct proper due diligence on the Sipp providers they recommend.
This time last year, providers were preparing to implement PS14/12, the final capital rules for Sipp operators, which came into force on 1 September 2016.
Last year, in FinalytiQ’s Sipp financial stability guide, we anticipated not everyone would make it to the other side in one piece. We were correct.
A number of Sipp providers fell by the wayside in the run-up to September 2016 and in the months after it:
European Pensions Management went bust in June 2016. It was then acquired by Suffolk Life, which is part of listed pensions firm Curtis Banks.
Brooklands Pensions entered into administration in July 2016 and accepted a buyout deal from Heritage Pensions. The firm has since rebranded as IVCM. IVCM now accepts Sipp business under the IVCM Heritage brand, an overseeing trust.
Also in July last year, Rowanmoor was acquired by Embark Group, the parent company of Hornbuckle.
In September 2016, London & Colonial was acquired by Isle of Man-based financial services business STM Group for £5.4 million.
In the same month, Wensley Mackay was acquired by platform provider Praemium.
Also last September, Mattioli Woods acquired pension administration firm MC Trustees, which had £400 million of assets, for £2.2 million.
Just the beginning
It is easy to conclude that this spate of consolidation was driven by regulatory change. But this is incorrect.
PS14/12 accelerated the demise of unsustainable ‘mom and pop’ Sipp operations. These small businesses, often family run, lack the management structure to grow in a competitive and highly regulated market. Their demise is a good thing. But we have not seen the end of consolidation in the Sipp market.
There are indications that some providers are still having a difficult time post-PS14/12. At least three Sipp providers have failed the Financial Conduct Authority (FCA) capital adequacy requirements and 14 firms wrongly reported their capital to the regulator.
Our latest Sipp financial stability report for 2017, titled ‘Life After PS14/12’ and written in conjunction with industry veteran John Moret, benchmarks the top 16 bespoke Sipp providers, who together account for more than 90% of the non-insured bespoke Sipp market.
The report shows that, a year after PS14/12, the industry is set to unravel under the regulatory spotlight. The effect of the FCA crackdown on providers’ retained interest is starting to feed through to the bottom line.
Since 2013 the regulator has required providers to treat retained interest on cash accounts as a charge and take it into account in projections and projected charges in the same way as any other product charge.
However, in its consultation paper CP15/30, the FCA stated that some providers were not following these rules and thus charge comparisons between providers could be misleading. Subsequently, in PS16/12, the regulator confirmed that, from April 2017, Sipp-retained interest charges should be included in projections and charges information.
On the one hand, Sipp providers are better capitalised than they have ever been. Collectively, Sipp providers reported a total pre-tax profit of £40.3 million on their revenue of £227 million, a profit margin of 18% for the year ending 2016.
But significant risks persist. Potential legal claims in relation to poor investment advice and failed investments pose risks to some providers.
One example of a problematic investment that has entered the public domain is Elysian Fuels, where the value of shareholdings has apparently been cut to zero. James Hay has confirmed some of its clients have invested a total of £55 million in this investment and it is known that several other Sipp providers have clients holding this investment.
The regulator expects due diligence to be done. Clients deserve it, and your business is better for it.
Abraham Okusanya is director of FinalytiQ.