The Financial Conduct Authority’s (FCA) capital adequacy rules have shaken up the Sipp market and threatened the future of many small firms, but size alone will not secure survival, according to Hornbuckle Mitchell chief executive Phil Smith.
Smith, who took charge at Hornbuckle two weeks ago, after acquiring a 60% stake alongside fellow private investor Richard Wohanka, said the service Sipp providers offered would be crucial in an increasingly competitive sector.
Last year the Financial Services Authority announced plans to hike Sipp capital adequacy requirements, meaning the absolute minimum capital a provider would have to hold increased from £5,000 to £20,000.
The regulator also ruled that providers that held non-standard assets, such as unregulated collective investment schemes and commercial property, would have to hold additional capital.
The rule change was predicted to make life much harder for smaller Sipp providers and lead to a spate of consolidation, which came to pass with five deals for Sipp businesses completed since the rules were first proposed in November 2012.
Focus on service over size
Smith said Sipp operators needed to have at least £2 billion of assets in order to survive, and the remaining players would then compete on service rather than size.
‘What’s most important is to meet the expectations of the end client: what they look for is security, technical expertise, good governance, right pricing and, more importantly, that you’ll be around when they retire,’ he said. ‘That translates to a critical scale, which enables you to carry on providing all those things.’
Smith, who was previously managing director of Barclays Wealth, said he was looking to grow Hornbuckle, but that acquisitions would not distract the firm from looking after customers.
‘If you look at other acquisition deals, there’s a lot of distraction and reaction in the press for a small book of business. It can distract from the main aim of good delivery to standard business partners. Getting the balance right is, or will be, part of the process for companies,’ he said. ‘There are all the elements there to say that a good way forward is organic growth.’
Smith and Wohanka have backgrounds in investment management rather than pensions, but they see growth in the Sipp market.
Smith said there were opportunities, but that Sipps needed to change the way they were perceived to take full advantage of demographic shifts.
Sipps had traditionally been seen as accumulation vehicles but would need to be seen as an option for decumulation too if they were to gain from a wave of wealthy clients approaching retirement, he said.
‘There’s a seismic shift coming in how people see their Sipp company. We need a different way of thinking about the Sipp market in the forthcoming years.’
Smith said changing demographics and tougher regulation should not overshadow the opportunities for the Sipp market which was benefiting from clients’ appetite for alternative investments and better qualified personnel.
He said the stress and lower pay in traditional financial jobs, such as investment banking, meant graduates were looking at roles they would not previously have considered.
‘First-class graduates from Oxbridge would be interested in coming to work for us if we pitch the firm well nowadays, whereas that might not have been the case 10 years ago,’ he said.
‘These new graduates are not being paid the same money for the old stresses. There are no promises of riches in investment banking anymore. The pension market is like it was in the 1980s in terms of career interest.’
2013-present Hornbuckle Mitchell, chief executive and owner
2011-present Aretai Consulting, managing director
2006-2011 Barclays Wealth, managing director
2001-2006 Fortis Investments, chief financial officer
1998-2001 Andersen Business Consulting, HR director
1992-1998 Prudential Collective Investments, HR director