Surviving in the SIPP market

Dramatic change in the SIPP market is having a profound effect on providers. Greg Kingston says advisers need to do their due diligence to make sure they choose a provider able to meet these challenges.

By the end of 2011 there were in excess of 800,000 Self Invested Personal Pensions (SIPPs) spread over 110 SIPP providers, with just one increasingly concerned regulator charged with their oversight.

For some time it has been clear that the SIPP industry is changing dramatically with more consolidation, increased regulation and pressure on the bespoke end of the market. For much of this advisers have kept a watching brief but this is changing in 2012.

Regulatory pressure

As well as all their own Retail Distribution Review (RDR) preparations, advisers will also be preparing for those clients that need action before the end of the tax year. This follows shortly after the introduction of capped and flexible drawdown in 2011 and provides yet another year of change for the SIPP industry.

The first change to come in 2012 will be the abolition of protected rights, bringing with it undoubted requirements for system changes alongside changes to illustration systems and literature. Providers will need to keep illustrations under constant review throughout 2012 as RDR, SMPI rules and the Test Achats European Court judgement will all have an impact.

Add to this the Financial Services Authority's (FSA) own ongoing thematic review, UCIS review, proposals for increased disclosure and refining the original CP 11/03 review and it is already becoming clear that some SIPP providers might not be entirely focused on delivering service and administering SIPPs.

Where's the revenue to fund it all?

The smaller providers are likely to be hardest hit, as market data indicates around 80% of SIPPs are concentrated in six or seven providers. That is the statistic that really frightens the regulator and one which advisers will increasingly have to take heed of.

Growth in the bespoke end of the SIPP market seems to have stalled, but that's not the full story. Several providers who only write bespoke business are still seeing healthy net growth inevitably meaning there are some shrinking businesses out there. Driving through all the regulatory change in 2012 from a base of lower revenue will be an incredibly tough challenge. We will not only see some providers' focus shifting away from core business but we are also likely to see questions raised about the overall viability of some of these businesses.

The issue that few companies are willing to acknowledge is the one of increased capital adequacy. The FSA's Milton Cartwright has been vocal in bringing attention to findings of poor record keeping, particularly involving UCIS and non-mainstream investments. He has also gone on the record that six weeks capital is not sufficient to wind up a business of this nature. He has drawn comparisons with defined contribution occupational schemes, which have capital requirements of between 18 and 24 months. That is a staggering increase, albeit a clear, bold statement from the regulator, and one which only a handful of SIPP providers would be able to provide. The FSA's intent appears to be clear: it wants fewer, stronger SIPP providers.

Reasons to be cheerful

Advisers that plan to look after their clients for the medium to long term have reasons to be cheerful. Some SIPP providers have adapted well to the regulatory changes imposed upon them since 2006. Generally those that were most prepared at the time have remained in good shape for 2012. Indeed there are signs that some are prepared to go further as talk of consolidation within the SIPP market continues. The clock is ticking though, and 2011 saw several potential sales or acquisitions fall through such as LV= and Hornbuckle Mitchell, Pointon York took itself off the market and IFG (parent of James Hay) was unable to work out a deal with Bregal Capital.

The interest from non-core SIPP providers appears to be waning. This is perhaps due to the increasing regulatory overhead which is being compounded by uncertain visibility and liabilities in certain investment books. Advisers talk about the need to undertake due diligence on SIPP providers, not just at the outset but ongoing too and it is a safe bet that any potential buyers will also continue to do the same.

Taking a bet on their SIPP provider isn't something advisers are going to want to do in 2012 when they've so much else to focus on. However they are going to want to invest time in making the right choice now - it will save them time and possibly the credibility of their relationship with their clients over the longer term.

Greg Kingston is head of marketing at Suffolk Life