Liberty SIPP's John Fox puts forward his view on SIPP cash commissions.
However much some in the industry would like to brush it under the carpet, the debate surrounding SIPP cash commissions isn't going anywhere.
The argument that it is of little importance in the grand scheme of things was put forward a few weeks back in an article on this very site - SIPPS: A Conflict of Interest - and is one with which I profoundly disagree.
In fact, I think cash commissions are perhaps the number one issue in the SIPPs industry right now.
I'm truly at a loss as to how these commissions can be seen as insignificant when they form the basis of many SIPP providers' entire business models - and therefore financial strength.
In this sense, they are not insignificant compared to more important matters such as capital adequacy but are actually a key determinant of capital adequacy.
Make no mistake about it: many SIPP providers get uncomfortable when cash commissions come up because they know that if the FCA were to single these payments out for attention then their very futures could come into question.
Legitimate model? Really?
Now there were a lot of things that I disagreed with in this article but what struck me as particularly worrying was the claim that the interest siphoned off from mandated SIPP current accounts constitutes a generally legitimate business model.
If a business model that is based on taking money for nothing from clients, and often doing so without their knowledge, is perceived to be legitimate then our industry hasn't evolved as much as I thought it had. In fact, it hasn't evolved at all.
To date, the whole practice of cash commissions has been deeply non-TCF and totally underhand. The SIPP providers who do it do it because it's money for old rope and means they can offer a competitive headline price structure.
And even now, in the brave new world of disclosure that came in during April, is there any reason to believe that elements of the industry will pay the new rules anything other than lip service? Transparency in theory is different to transparency in practice.
For me, this article highlighted more than anything how certain elements within the SIPP industry seem to believe that if they say they're doing nothing wrong enough times then they are doing nothing wrong.
Wheat from the chaff
So what would we do about the matter of commissions on mandated SIPP bank accounts?
To start with, we would like to see the FCA factor the dependency of SIPP providers on current account commissions into the new capital adequacy regime.
This will immediately separate the wheat from the chaff and expose those SIPP providers that on the surface are financially strong but in reality are massively leveraged.
There are more of them out there than you might think.
As we have argued on our blog and elsewhere, we are also urging the SIPPs industry to adopt a ‘clean price structure' that is sustainable rather than, as happens all too often, sustained at the expense of the customer.
This is surely the best approach for the industry as a whole?
The irony is that it's often the larger, corporate SIPP providers claiming that smaller SIPPs have the most to fear about capital adequacy who are the ones that are the most dependent on cash commissions for their revenues - and therefore the most at risk.
Any major change of direction at the FCA, any integration of cash commissions into capital adequacy requirements, and they will come seriously unstuck.
It's a volatile time indeed for them, but then they have only themselves to blame.
John Fox is managing director at Liberty SIPP
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