For some SIPP providers without the critical mass of business to ride out the economic turbulence – and let’s not forget the steadily increasing overhead of the newly introduced regulator – maintaining growth was the only option.
In times of investment instability the promise of lucrative returns can be alluring, especially for the unadvised. Some SIPP firms needed continued growth from somewhere, investments needed funding and investors wanted a positive return to correct their losses. Enter the unregulated investment market.
This has not turned out to be a marriage made in heaven – which is why the regulator continued to be vigilant and has now acted with CP12/19. The FSA repeatedly spoke of its concern with certain types of esoteric investments and has been busy taking action against some. It raised concerns about pension funds via SIPPs providing significant finance for these investments, in particular when they are the only asset into which the SIPP invested.
But the FSA’s unease is broader. It is not only concerned with these SIPP investors, but also with all the others. If sufficient SIPPs fail then a provider can easily lose sufficient revenue to threaten the whole business. That affects all investors no matter where their assets are invested or whether they are advised or unadvised.
Recent UCIS failures have shown that in some cases a single investment can form a significant proportion of a SIPP providers’ business, as much as 5 per cent in some cases. Often it is the only investment within the SIPP, so when the investment fails that revenue disappears. Take 5 per cent of revenue out of a business and it can be highly damaging – the troubles of eurozone countries such as Greece provide a chilling example of what can happen when growth falls by just a few per cent.
Cash is king
That is why the FSA wants SIPP providers to have more capital, to manage situations just like this. However, it does not want to damage the industry, leading it to attach the greatest capital requirements to the illiquid investments that pose the highest risks. SIPP providers that specialise in lower-risk, more liquid investments, such as collective-focused platform SIPPs, are likely to have less to fear from the regulator’s proposals.
It is not black and white though – how the regulator decides to best apportion capital requirements to risk will be a delicate balancing act. Parts of the bespoke, traditionally high-net-worth end of the market are alive and well, and the regulator needs them to play a vital role in the rehabilitation of the SIPP market.
No nasty surprises
