August 2007

Sweeping changes

The changes introduced at A-Day were the key catalyst for growth in the SIPP market. In the run up to the new simplified regime pension providers and advisers geared themselves up to take advantage of the relaxation of the benefits regime and the extension of investment freedom that was promised.

Despite the consternation caused by a number of u-turns in the legislative process since 6th April 2006, interest in pensions still remains buoyant. This is particularly true of the SIPP market. The advent of FSA regulation in this market has yet to create much of an impact with over 250,000 contracts currently in force holding in excess of £29 billion in assets. There is every indication that the sector will enjoy continued growth.

Depending on who you talked to about the introduction of SIPP regulation would depend on the response you received. The mainstream insurance company providers of SIPP contracts viewed the introduction of regulation as an extension of the already existing regime that they followed and broadly welcomed its arrival. The smaller providers, not previously subject to FSA oversight in this area viewed the new regulations with a degree of trepidation.

Advisers were split on the subject. Many took the view that the new rules were unnecessary and would create an additional layer of bureaucracy. There was already regulation in the advice process so why was there a need to introduce a further layer of rules? Other advisers took the view that the introduction of FSA oversight would be good for the industry providing an additional layer of consumer protection and confidence.

Effects of regulation

There is a school of thought that suggests the market will consolidate with a number of the smaller players dropping out, as the cost of regulation eats into their business. So far there has been little evidence of this and the converse seems to be true with a number of new contracts coming to the market and numerous contract changes to existing arrangements.

Whether these changes are due to regulation or to the broader effects of A-Day is unclear but what this means for advisers and their clients is that there is now much more choice in the marketplace as competition among providers continues. While this can make the adviser's role more complicated, trying to assess which contract best suits the clients' needs it is likely that the new regulations will fuel further change. Only time will tell whether or not regulation will cause a reduction in the number of providers but in any event, we are likely to see more transparency particularly with charges and this can only be of benefit to advisers.

From a practical point of view the introduction of regulation has had minimal effect on the adviser's role save for the area of cancellation rights.

Due to the specialised nature of the investment structure of a SIPP, the application of cancellation rights for a contract could have significant influence in the establishment process and this is something advisers need to consider in more depth. Most providers will allow the waiver approach to be adopted for contributions but there are a number of different approaches being adopted for pension transfers. Some providers are using the conventional cancellation process including the application of shortfall if cancellation occurs while others are permitting investment on the client's instruction thereby lapsing cancellation rights.

Others are offering the substitute approach but it is important that advisers understand what regime will be applied so that the clients understand how their proposed strategy could be affected. While the FSA has issued further guidance, until every provider operates from a level playing field, this is one area that merits additional consideration.

The FSA will continue to apply a principles based approach to regulation and while this will have an impact on the products being offered by providers we are going to see much more of an interest in the adviser's recommendation process for SIPPs going forward.

There has already been a degree of press coverage over the misuse of SIPPs for certain classes of investors and while there is not likely to be another mis-selling scandal the FSA will doubtless consider this area in more depth. The whole issue is made more complicated due to the nature of the insured market with a number of open architecture pension contracts readily available for clients that do not want to 'self invest' or do not have the required level of savings to initially justify SIPP fees. In the whole Treating Customers Fairly arena advisers will need to take extra steps to ensure that the SIPP contract they are offering is what the client needs and that a suitable alternative is not readily available in the insured market.

In summary, there are a number of areas that will affect advisers but the benefit that regulation will bring to the market will give rise to greater consumer confidence with more choice for advisers and transparent competitive contracts.

Martin O'Gorman
Pension Specialist
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