SIPP Due Diligence: Lowest Common Denominator Is Not Enough

We’re delighted to publish the maiden edition of our SIPP Financial Stability Guide. We teamed up with SIPP industry veteran John Moret aka ‘Mr SIPP’ to provide an unprecedented insight into the financial performance of non-insured bespoke SIPP providers. The guide is packed full of data and insight on AUA, revenue, profit, profit margin, non-standard assets and capital adequacy requirements, including provider’s preparedness to meet the PS14/12 due in September, 2016.

When we first mooted the idea of doing this research, we spoke to a number of people in the industry. Most agreed with us that this piece of work is both long-overdue and timely. However, we had a number of people who weren’t particularly keen on the idea, perhaps in fear of what we might find if we scrutinised their businesses. Some told us that the exercise is nearly impossible, given the number of small players in the sector.

Now, I’m totally comfortable with people disagreeing with me. Indeed, I took it as a compliment when someone told me, ‘I’d like to see things from your point of view but I can’t quite get my head that far up my bum.’ What I found absurd is an attempt to explain away the need to scrutinise the financial stability of a SIPP provider on the basis that, since providers are authorised by the FCA, then advisers should take for granted that the provider is financially stable.

This is by far the lamest excuse for inadequate due- diligence I have come across yet. And believe me, I’ve 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 expectations. In its recent thematic review TR16/1, the FCA said it considered inadequate research and due diligence to be two of the main causes of suitability failings. As a result, adviser due diligence has never been higher on the regulator’s agenda. If the FCA thought regulating product providers was a strong enough indicator of their financial stability, why does it make due-diligence a regulatory obligation for advisers?

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The point is, to meet their regulatory and professional obligation to clients, advisers should put SIPP providers under greater scrutiny, with a particular focus on financial stability and long 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 it being financially stable. It’s one thing for a SIPP operator to be regulated by the FCA, it’s another for their business to be run profitably with sufficient capital resources and the scale required to remain in the market for 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 advisers select providers who have the best chance of being around for the long term. The longevity of SIPPs is a key attraction of this market for providers, particularly given the inertia created by inefficiencies in the pension transfer market. These factors make it all the more important that the “right” SIPP is selected at outset.

SIPP FS Ratings 2

As the new requirements come into force, advisers can expect to see the consolidation of books of assets, with many of the smaller SIPP 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 mention the administrative cost it adds to the adviser’s business. While most client assets will not necessarily be at risk, 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 largely standard assets may end up with providers that their advisers feel uncomfortable with in terms of cost, service or reputation. There’s also the damage that 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, in terms of reviewing their existing providers and selecting new providers that are financially stable, and likely survive and thrive. This is exactly why we put this report together — to make the due-diligence process less burdensome for advisers and arguably for providers.


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Abraham Okusanya
Abraham is the founder of FinalytiQ, a research consultancy for platforms, asset managers, and advisory firms. Recognised as one of the country’s leading experts in retirement income, platforms and investment propositions, Abraham has authored several papers on these subjects and delivered talks to the Personal Finance Society, The FCA and several conferences across the country.
He holds a Master’s degree from Coventry University and an alphabet soup of qualifications, including the Investment Management Certificate, Chartered Financial Planner, CFP and Chartered Wealth Manager designations. He was one of 5 finalists for the Professional Advisers Personality of Year Award 2015 but the award went to a more deserving winner, obviously!

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