For so long the SIPP industry has escaped the kind of intense scrutiny that other providers are typically put through and there is currently very little independent rating and benchmarking to assess the financial stability of providers. That’s until now!
As the new requirements come into force, advisers can expect to see the consolidation of books of assets, with many providers disappearing from the market altogether
In 2014, we produced our first benchmarking report on the platform industry, with particular focus on financial performance, profitability and re-platforming. Our report anticipated much of the structural changes going on in the platform sector right now and have been credited for raising the bar on the way adviser conducted due diligence. So when SIPP industry veteran John Moret agreed to oversee our financial stability benchmarking exercise for SIPP providers, we were over the moon.
It doesn’t exactly take a genius to figure out that the SIPP market is currently undergoing a sea-change driven by commercial and regulatory pressures on providers. New capital requirements (FCA Policy Statement 14/12) are due to come into force on 1 September 2016, and providers are already bracing themselves for the potential impact of an FCA crackdown on retained interests on deposits through greater disclosure or worse. Also we can expect even greater focus on investments – particularly those classified as non-standard. Furthermore, the need to upgrade technology and IT systems, implement tighter risk controls and meet increasing client demand off the back of Pension Freedoms will put even more pressure on SIPP providers. We have seen an increase in the pace of consolidation and M&A activities in the sector, and this trend is expected to accelerate even further.
With a typical SIPP client facing 30 to 40 years in retirement, it’s crucial that adviser selects providers who have the best chance of being around for the very long haul.
Lowest Common Denominator Is No Due Diligence
When we first muted the idea of doing this research, we spoke to a number of people in the industry. Most agree with us that this piece of work is both long-overdue and also rather timely. However, we had a number of people who weren’t particularly keen on the idea, perhaps for fear of what we might find if we start snooping around their businesses. Some told us this is nearly impossible, given the number of small players in the sector.
One reason given to explain away the need to scrutinise the financial stability of SIPP provider is that idea that, since providers are authorised by the FCA, then advisers should take it for granted the provider is financially stable. This is by far the lamest excuse for inadequate due-diligence I have come across yet. Believe me when I tell you I have heard quite a few of those in my time. The idea that advisers’ due diligence should be based on the lowest common denominator – i.e. being regulated by the FCA – is not only short of professional standards expected by the regulator but also well below client expectation.
In its recent thematic review TR16/1, the FCA said it considered inadequate research and due diligence as two of the main causes of suitability failings. As a result, adviser due diligence has never been higher on the regulator’s agenda. Accordingly, to meet their regulatory and professional obligation to clients, adviser due-diligence should put SIPP providers under greater scrutiny, with a particular focus on financial stability and longer term viability. Advisers must never take it for granted that just because a provider meets the lowest common denominator of being regulated by the FCA, then that equates to being financially stable. It is one thing for a SIPP operator to be regulated by the FCA, it’s another for them the business to be run profitably with capital resources and scale required to remain in the market in the long haul.
Most SIPPs remain in force for many years through and after retirement. With a typical SIPP client facing 30 to 40 years in retirement, it’s crucial that adviser selects providers who have the best chance of being around for the very long haul. The longevity of SIPPs is a key attraction of this market for providers particularly given the inertia factor owing to the inefficiencies in the pension transfer market. These factors make it all the more important that the “right” SIPP is selected at outset.
As the new requirements come into force, advisers can expect to see the consolidation of books of assets, with many providers disappearing from the market altogether. This will create anxiety for clients and could do some damage to the trust advisers have spent years building, not to talk of the administrative cost it adds to the adviser’ business. While most client assets will not necessarily be at risk as a result of these changes, some providers are sitting on toxic books of assets, which may fall foul of FCA and HMRC rules. The risk is that even clients with relatively standard assets may end up with providers that their advisers feel uncomfortable with in terms of cost, service or reputation, never mind the damage the uncertainty does to the relationship between adviser and client when a provider is acquired or exits the market. All of these raise a major due diligence challenge for advisers, both in terms of reviewing their existing provider and in selection new providers that are financially stable, who are likely to not only survive but thrive.
This is exactly why we put this report together, to make the due-diligence process less burdensome for advisers and arguably for providers. The scoring system is rather stringent, for obvious reasons. We don’t award brownie points to provider for just meeting the minimum common denominator such as holding the minimum regulatory requirement. Instead we award points for keeping over above the regulatory requirement, which is considered good business practice. Our overall premise is that providers with track record of profitability, surplus capital resources (over and above regulatory requirement), above-average profit margins, healthy mix of assets and growing market share have demonstrated that their business strategy works and can be expected to not only survive but thrive in the increasingly competitive landscape. Providers who are loss-making or operating on thin margins and those holding the bare minimum capital requirement will struggle to absorb competitive and regulatory shocks; they are vulnerable to acquisitions by stronger players. For these providers, the light at the end of the tunnel is on oncoming train!
 TR16/1: Assessing suitability: Research and due diligence of products and services