The FSA’s findings included evidence of:
One of the final statements in the press release accompanying the report clearly outlined the FSA’s view:
“Together, these findings make it clear that SIPP operators have the potential to lead to significant consumer detriment through a failure to adequately control their businesses.”
I am sure that I am not alone in experiencing a hint of frustration at this sort of industry generalisation. You can be sure that many of the traditional pension providers who were at risk of losing business to this area will use this as a tactic to cast a cloud over the SIPP industry in general.
I will look at the specific points raised in the review in a second, but first it’s worth reminding ourselves of the make-up of the SIPP industry.
The FSA issued its Retail Investments Product Sales Data Trend Report in August 2012. This identified 120 SIPP operators, of which the top five were responsible for 69% of the business written. The report doesn’t identify the top five firms, but it will involve firms like AJ Bell, Standard Life and Hargreaves Lansdown.
It is not for me to comment on the way that any other firm runs their business, so I will leave it for readers to form their own view on the approaches that different firms adopt for corporate governance, the application of CASS, senior management controls, risk management etc. I can only say that a lot of time, effort and resource in our business is allocated to this.
Looking at the findings, it seems that the FSA’s concerns can sensibly be grouped under two headings – corporate governance and investment problems.
On corporate governance, you can’t help but think that the points raised in the review are reasonable expectations of any firm operating in a regulated financial services area. As one of the firms operating a significant number of SIPPs, we benefit from having our own relationship manager at the FSA. We are in regular contact with our relationship manager, operate the business as if it were a plc, and are subject to the additional regulatory requirements which come from operating in the platform space and being a member of the London Stock Exchange. Does this mean we will be resting on our laurels and thinking that the thematic review isn’t particularly relevant to us? Of course not.
Turning to investment issues, there are lessons to learn for anyone active in this market. I also believe that this extends to all of the Government bodies responsible for the way in which SIPPs are regulated. Clear control mechanisms are needed, setting out exactly what can and cannot be held within a SIPP. I’ve said it before, and will do so again: a permitted investment list, similar to that in place until 5 April 2006, would do an awful lot more good than it would do harm.
If evidence is needed to support this view, you simply need to consider that the FSA did not regulate the industry in those days, but there were few issues with SIPPs investing in any of the weird and not-so-wonderful investment structures that we see today. A sensibly structured permitted investment list could minimise risk in this area.
If it is accepted that a permitted investment list would be a positive move, the next question is; who should create it and retain responsibility for it?
Option one is HMRC. They used to be responsible for the list, but would probably now say that their remit does not extend beyond confirming whether an investment would lead to tax charges – and this isn’t actually a problem when it comes to many of the esoteric investment structures.
Option two is the FSA, but they may have concerns about market distortion. A significant number of SIPP operators at the bespoke end of the market rely on their flexibility to allow esoteric investments for a significant chunk of their new business.
The final option is self-regulation, perhaps with an investment list created by the industry body AMPS. I’m sure AJ Bell would support and adhere to this list. Sadly, all it would take is one provider failing to adhere to it, and the spirit of self- regulation would be lost.
Some will tell you that the findings of this review have the makings of their own little superstorm. I have no doubt that there will be lessons to be learned for some firms, but I think it’s important to appreciate that there are many SIPP firms out there that don’t deserve to be dragged into the storm. On the investment front, some of the problems articulated are very real. Why not embrace the obvious solution before we regret the damage that is done?
Billy Mackay, Marketing Director, AJ Bell