Round two of the regulation of Sipps, warns John Moret, director of sales and marketing at Suffolk Life, might prove a step too far for the smaller players
We are now some four months away from what those working in the world of Sipps might well call A-Day II. I refer to 6 April 2007 - the implementation date for the FSA's new regime for the regulation of personal pensions, including Sipps.
Details of the new regime were confirmed in the FSA's policy statement 2006/07, which runs to 156 pages and is not the easiest of reading material. However, as the contents are considered and reviewed, the potential impact for all those current and prospective operators of Sipps are starting to become clear.
The new regime was heralded last year when the Treasury consulted with the industry on possible regimes for regulating Sipps - this, of course, was against the backdrop of unrestricted investment freedom, which as we now know was not forthcoming. The new regime resolves some particular issues including:
lCurrently there are somewhat artificial restrictions on the type of organisation that could act as provider of a personal pension scheme, including a Sipp. For example, investment trust companies, private client stockbrokers and financial advisers cannot act as providers in their own right. This has led to a growth in structures involving a 'tame' third-party provider - often a bank acting as provider - and the legal and regulatory responsibilities behind such structures have often been far from clear. Under the new rules, any organisation that is suitably authorised by the FSA as an operator will be able to set up and run a Sipp. This seems an eminently more sensible arrangement and it may also open up the market to new competition.
lUnder the current regime there is a very uneven playing field as a result of the different regulatory status of the various providers and administrators. Currently a minority of Sipps are fully regulated - in the main these are the ones provided by life companies. Other administrators have operated in a variety of ways, sometimes adopting some but not all aspects of the FSA's Conduct of Business rules. Then again, some administrators have operated outside the ambit of regulation. While these different approaches have not necessarily harmed the development of the Sipp market, they have certainly given rise to considerable confusion and lack of clarity in a variety of areas such as compensation arrangements and cancellation rights.
The reality of the new regime is that it moves all Sipps on to the same footing. For advisers, the most significant change is that rights under a personal pension scheme, including Sipps, are now deemed to be an investment and advice on those rights will be a regulated activity. Sipps will be treated as a packaged product and independent advisers will need to take account of the whole personal pensions market when advising on Sipps.
Transfers from occupational schemes into Sipps will be classified as pension transfers within the rules and a higher level of advice will be required. For whole-of-market advisers operating their own Sipp, the initial disclosure document will need to be amended to ensure any potential for conflict of interest is adequately disclosed.
The current Conduct of Business rules will apply and operators will need to be familiar with requirements such as key features and projections. Since the Conduct of Business rules will be introduced in November 2007, the FSA has provided an interim arrangement for key features and there is no requirement to issue a projection automatically at the point of setting up a Sipp, although operators can provide these if they wish.
There are also some slightly modified proposals on cancellation rights. Generally, new Sipp investors will have 30 days to cancel, although there is a facility to allow cancellation rights to lapse if agreed - for example, if an investment such as property might be compromised. The full gamut of financial promotion rules will apply, which will mean all operators must have a process in place for signing off all their promotional material, no matter what form it takes.
Finally - and importantly - there are new expenditure-based capital requirements for operators of Sipps. These will potentially be very significant for firms that operate Sipps alongside, for example, a financial services practice. In many instances the operator of the Sipp will be deemed to be holding client money and will, as a result, have a higher capital requirement - which might extend across the whole of the business, depending on the structure. It is an area where some specialist assistance may be needed.
The full impact of the new regulatory framework is yet to be felt. New and current Sipp operators have until 5 April 2007 to seek appropriate authorisation. However, there are already signs that, for some of the smaller and currently unregulated providers, regulation will be a bridge too far - particularly given the new HM Revenue & Customs reporting requirements following simplification.
The onus on the operator will be significant and, in most cases but not all, this will be the pension scheme administrator as defined in the Finance Act 2004. The application process will almost certainly lead to some administrators concluding that their business does not have the necessary resilience and scalability to meet the FSA's authorisation requirements.
What then happens to any existing Sipp business is an interesting question - particularly where there is a 'tame' provider. A regulated operator will need to be found before 6 April and that may prove to be a challenge. Watch this space.
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