The Financial Services Authority recently released its consultation paper on Sipps which may have major consequences for providers' capital adequacy requirements.
The minimum amount firms are required to hold would increase from £5,000 to £20,000 and could be even higher for firms which hold "risky" assets.
This could significantly impact smaller firms who deals in property, classed as a 'non-standard' asset but a common inclusion in higher end Sipp portfolios. As well as this the FSA has also issued details on the disclosure regime for Sipps and carried out a thematic review.
In this penetrating article for Technical Update, Mike Morrison of Sipp provider AJ Bell looks at the history of Sipp usage and how the new requirements may affect Financial Planners and firms.
2012 was a long and difficult year for financial services and the Sipp sector has had quite a tough time - even though its share of the pensions market continues to increase.
In 2012 the FSA issued three specific papers focusing on the Sipp market, as well as a paper on UCIS that also had a profound influence on Sipps. The three papers on Sipps were:

• CP 12/29, issued in November, which introduced a disclosure regime for Sipps
• GC 12/12 'Sipp Operators – A Thematic Review'
• CP 12/33 'A new capital regime for Sipp operators'

The aim of this article is to look at each of these papers and to discuss their potential implications.

The Sipp disclosure regime
Sipps became regulated in 2007 and the FSA put them into the category of 'packaged products', with the need for Sipp operators to meet certain criteria. I think this was a sign that, ultimately, the FSA was going to treat Sipps in very much the same way as other personal pension products. One of the main existing differences was the disclosure of charges and the production of key features documents.
In this light, the Association of Member-directed Pension Schemes (AMPS) completed a piece of work in conjunction with the Association of British Insurers (ABI) in 2010, headed 'Provider Guidance for the explanation of Sipp fees'. This aimed to address some of the key requirements around the disclosure of fees and key features documents, acknowledging that some investment classes that could be purchased under Sipps might have specific issues. For example, how do you illustrate a plan that invests solely in commercial property or ETFs, or a Sipp where the money will be tactically invested into the equity market over a period of time?
This point was picked up by the FSA in CP 11/03 in February 2011, when it floated the idea of Sipps with certain asset types being treated differently for disclosure purposes.
The response to CP 11/03 appeared to be at some form of impasse when the FSA announced that it would re-ask the industry for views. So it came as something of a big surprise when, in its quarterly consultation - CP 12/05 - the FSA proposed a regime that would require all personal pension schemes (including Sipps) to produce key features illustrations, as well as information on reduction-in yield and the effect of charges.
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This was confirmed in CP 12/29, which also indicated a requirement for Sipp operators to explicitly disclose any bank interest or commission they retain on members' funds.
The date for Sipp operators to comply is 6 April this year. I think there are a number of key quotes from the Paper which show the heart of the FSA's thinking: "In order to achieve this, we are proposing that the existing Sipp exemptions are removed from COBs 13 and COBS 14, and the same disclosure rules applied to all personal pension schemes, whether branded as a Sipp or not."
"In 2007 Sipp operators became subject to regulation by the FSA. Since then sales of pension schemes described as Sipps have grown, so much so that they can now be considered mainstream rather than niche products. Moreover, our product sales data shows that sales of pensions categorised as Sipps exceed sales of those categorised as individual personal pensions. This is primarily due to more Sipps being offered by life companies or made available online...This same product sales data also indicates that non-advised sales of Sipps almost outnumber advised sales. So, in making important pension decisions, a significant number of pension scheme members are not receiving advice and must rely mainly on information provided by the scheme operator."
Sipps are no longer a cottage industry and the FSA is concerned that, as they are now mainstream, consumers should have similar protection as they would for non-Sipp pensions.
I think most Sipp operators have accepted this as the position, and that, although the changes could be costly, this is what will be required and ultimately has the consumer's best interests at heart.

Sipp Operator Thematic Review
The second part of the jigsaw was the Thematic Review of Sipp providers, published in November 2012. There were a number of key findings:

• A poor understanding among firms' senior management of regulatory requirements and responsibilities.
• A lack of senior management oversight of the conduct of their firm.
• Poor corporate governance.
• Inadequate risk identification processes and risk mitigation planning, which is not assisted by poor quality management information.
• An increase in the number of 'non-standard' investments held by some Sipp operators, which were then poorly monitored.
• Firms holding insufficient capital to absorb unexpected liabilities.
• A lack of adequate due diligence of Sipps introducers and Sipp investments.
• Evidence of conflicts of interest existing within some Sipp operators.
• Poor management of operational risk in some firms.

One of the key findings was the assertion that some of these shortcomings were leading to a growth in financial crime and the use of Sipps in such crimes.
No names were mentioned in the paper, and one reaction from the Sipp industry was that all Sipp providers were being tarred with the same brush. The reality again is, I think, linked to the disclosure paper – now they are mainstream, Sipps must operate as a mainstream financial services business would and have the necessary systems and processes in place. Due diligence and management information seem to be the key.

New capital adequacy regime
This thinking was continued in CP 12/33 - a consultation on changes to the capital adequacy regime and the amounts that must be held by Sipp operators. The capital adequacy proposals place certain requirements on Sipp operators in terms of the amount of realisable assets they must hold at any one time.
At present, the requirements are based on a minimum of six or thirteen weeks' business expenditure (depending on whether client money is held) and an additional component if a business wind-down calculation shows additional resources are needed. The FSA is proposing to change the rules so that the requirement is based on the value of assets under administration, and the percentage of schemes run by the Sipp operator which hold 'non-standard' investments.
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The consultation paper does not list the non- standard investments. Instead, it produces a list of standard assets and then says that anything that is not on the list would be a non-standard asset.
The main assets in the non-standard list would appear to be UCIS and other unregulated or illiquid assets but it would also seem to include normal commercial property. If anything, this is the one point that has hit the headlines. Is UK commercial property really a non-standard investment? Well, commercial property can be easily transferable but, occasionally, there can be issues and in reality it could perhaps sit in an intermediate category.
The proposals, if enacted as in the consultation, will lead to significant increases in the levels of capital that some operators will need to hold. This will particularly be the case for smaller operators who hold high percentages of 'non-standard' investments or even specialise in commercial property.
[In the wider scheme of things AJ Bell, as a provider, has asked for a return to a permitted investments list for Sipps. The categorisation of investments described above would suggest some further merit in this idea.]
At this moment in time this is just a consultation and the rules need to take shape. Care needs to be taken not to jump to too many conclusions at this stage. In particular, the definitions of 'standard' and 'non-standard' assets needs to be clarified, and the proposed calculation may be subject to change before implementation.
The way in which the Sipp operator can hold the assets it is using for capital adequacy purposes is being tightened up too, and this may also affect some Sipp operators.
Again, we are back to good client outcomes, and the FSA is keen to see sufficient resources in place to be able to wind up a Sipp scheme over a period of time – two years was quoted as being reasonable. With more non-standard assets, the argument is that it will be harder to achieve a 'clean' wind up.
The FSA itself has estimated that between 10 and 13 Sipp operators will leave the marketplace once the new rules have been introduced, so it will be surprising if the topic of capital adequacy is not high up on most advisers' due diligence.

Conclusion
In 2013 the Sipp market is on the verge of coming of age. Of the three areas I have looked at above, the capital adequacy regime is key. Sipp operators will need to consider their business models and to restructure appropriately. At the same time, the Thematic Review will lead to those businesses having to review their management information, their infrastructure and the knowledge that senior managers have of the business.
The development of the disclosure regime is, I think, just a logical consequence of the fact that the FSA wants consumers to see the numbers and the key features documents.
So, the Sipp market could well change shape in the next few years and I also wonder whether its development will influence events in the platform world:

• Sipps started as a bundle of services before they became regulated as a product – platforms seem to be going the same way.
• The Sipp Thematic Review showed shortcomings in the understanding of the CASS and client money rules. Platforms will have to ensure that they do not fall foul of similar problems.
• The complexity of Sipp charging does not lend itself to a standard set of disclosure rules and, again, the same could be said of platforms.

Let's hope that we see these changes in a positive way and that the market survives without too much controversy - the aim must surely be to make retirement solutions and saving more accessible to more people.

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