Martin Tilley discusses the issues facing advisers in the SIPP market
Commuters will be familiar with the call of the train conductor when the service reaches the end of the line and we could be hearing a similar call from some self invested personal pension (SIPP) providers in the coming months.
As the Financial Conduct Authority (FCA)‘s new capital adequacy proposals are considered, all SIPP providers will be assessing their ability to meet the new requirements by the regulators enforced deadline.
Some of the financially stronger firms will be able to meet the requirements from current resources or internal capital raising exercises while others may look to external sources. For some providers, an increase in fees will be inevitable but there will be others who will know that the new requirements are a journey too far.
The market has already shown an appetite for consolidation and for firms not able to reach the new requirements this would be the logical route. However, if the reason that the higher capital adequacy benchmarks cannot be met is as a result of high levels of non standard assets, the book of business is unlikely to be attractive to a purchaser as these styles of assets bring with them an additional capital adequacy requirement.
If an acquisition does occur, it will usually be in one of two ways. Either the purchase will be of the SIPP company itself, or as an alternative the client book and as such the clients will be required to transfer across to the new provider.
From a client and adviser point of view, the former is less trouble as the existing SIPP remains in existence. The only material change will be to the new provider's terms, conditions, processes and fees. However one needs to bear in mind that the purchaser could be acquiring underlying liabilities and one's due diligence needs to be particularly diligent
If the client book is purchased, this will usually require the establishment of a new SIPP within the new provider and a transfer in specie of assets to the new vehicle.
This can be a far more complex process, particularly where assets such as commercial property exist as this requires re-registration of the title, along with possible changes to any lending terms, insurance, VAT and property management. Even if the actual transfer is conducted on a no fee to the client basis, there is still the inconvenience of paperwork being completed. Money laundering and inevitable administration will need to be completed by the intermediary, whose time is valuable.
Where change is thrust upon an individual it is quite common not to accept the first given alternative. Where a client's SIPP is to be administered by a provider not selected by them or their intermediary, indeed by one that may have been previously rejected, is it better to find a new provider of their choice? Advisers might wish to look for alternatives sooner rather than later.
Indeed, an opportunity exists for advisers to take a proactive position in reviewing all their clients and thus re-assess whether a new SIPP provider is appropriate.
Researching at an early stage, a provider's ability to meet the new capital requirements and asking for a detailed summary of how the higher levels of capital adequacy will be achieved, will give an IFA an indication of whether the SIPP provider will become a target for future acquisition, or whether fee levels may be likely to increase.
If after review the adviser is concerned, an alternative should be sought. Most providers and certainly those with a strong proposition now publish routinely a "due diligence" pack providing key details about their company and product enabling an informed decision to be made. From this, an opinion as to whether a client recommendation to move providers might be prudent.
An adviser should be aware that their own client book can be very valuable. Indeed, undertaking a review of his client's SIPP portfolio as a whole will enable an approach to be made to a new SIPP provider to offer enhanced terms to receive an entire book of business.
Martin Tilley is director of technical services at Dentons Pension Management
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