November 2007

Fine in principle

It seems 2007 is proving another year of major regulatory and structural change for the pensions industry. April saw R-Day as the SIPP market came under the yoke of Financial Services Authority (FSA) regulation for the first time. Other key changes are timetabled for the autumn, most notably the introduction of New Conduct of Business Rules (NewCOB) on the 1st November.

Let us state one thing at the start - the principle of regulation is a good thing. Regulation of the SIPP market is now in line with all other personal pensions which means that SIPP operators now need to observe the requirements of both Her Majesty's Revenue and Customs (HMRC) and the FSA. There are some interesting contrasts in the approaches taken by these enforcers. A-Day introduced the new HMRC regulations, which moved away from a discretionary environment to a prescriptive one. In contrast, the FSA's New COB moves from a prescriptive rule book to 'principles-based' regulation.

Additional administration

The additional administration that is inevitable with FSA regulation would not necessarily be understood by advisers. This is because many of them will have adopted a universal approach to their advice process where non-regulated products are treated in the same manner as regulated products. Many independent SIPP operators will have discovered that R-Day has significantly increased the costs of administering their clients' arrangements and this inevitably places an upward pressure on fees.

In spite of the degree of regulation now in place, anomalies still exist. Many SIPPs are established with the intention of holding commercial property, which ordinarily will be the major asset of the arrangement. Yet, property purchase is still not regulated. L&C Pensions ensures that any property purchased under its Open Pension is a sound acquisition and that appropriately experienced legal advisers and professional property managers are employed for the execution of the associated activities and monitoring of such an asset. Some operators may be tempted to be less rigorous in order to lower cost pressures and indeed some make a point of saying that they will allow their members, who mostly have no relevant expertise, to oversee and manage the investment.

A key issue in the next few months for advisers and SIPP operators will undoubtedly be preparedness for New COB. New COB marks the reversal of a more prescriptive, rules-based system of regulation which, the FSA has determined, was proving too cumbersome for both the market and the regulator itself. The implication is that rules will become looser and the very British principle of fair play will now prevail.

The reality is, perhaps, less rosy because what it actually means is that every decision and piece of advice is still open to scrutiny and there is more scope for differences of opinion. No surprise then that SIPP providers and administrators have been avidly recruiting experienced compliance officers in their quest to ensure that their schemes are not likely to fall foul of the new principles-based regulation. So what are the key principles and what do they mean for the industry? There are 11 of them:

1. A firm must conduct its business with integrity

2. A firm must conduct its business with due skill, care and diligence

3. A firm must take reasonable care to organise and control its affairs responsibly and effectively with adequate risk management systems

4. A firm must maintain adequate financial resources

5. A firm must maintain proper standards of market conduct

6. A firm must pay due regard to the interests of its customers and treat them fairly

7. A firm must pay due regard to the information needs of its clients and communicate information to them in a way that is clear, fair and not misleading

8. A firm must manage conflicts of interest fairly, both between its customers and itself and between a customer and another client

9. A firm must take reasonable care to ensure the suitability of its advice and discretionary decisions for any customer who is entitled to rely upon its judgement

10. A firm must arrange adequate protection for clients' assets when it is responsible for them

11. A firm must deal with its regulator in an open co-operative way and must disclose to the FSA anything relating to their firm of which the FSA might reasonably expect notice.

While these requirements may seem onerous Nigel Sharp, director, L&C Pensions believes they shouldn't cause many people much of a problem. However, he is careful to point out that it is still early days and things will evolve:

"Well-run advisers and providers probably have nothing to fear from the new regime but until the FSA is conducting audits and test cases are established no one really knows whether their interpretation of these principles will accord with the established good practice evolved in the industry," he says. "For newly-regulated SIPP operators, the introduction of New COB will signal the end of a concession period granted by the FSA relating to product literature."

Twin challenges

On the positive front the market's competitive nature means that any providers lagging in these areas are likely to be highlighted by the adviser community, not to mention the FSA. Providers may even begin losing business if they don't continue focusing on the twin challenges of reducing the administrative burden on advisers while protecting the customer against making a poor decision.

It is also very clear from reading the FSA documentation around New COB that the new principles-based, outcomes-driven approach places a greater responsibility on senior management.

It seems that the FSA intends to evolve its relationship with the market to move from positioning itself as the strict teacher quoting the rule book to becoming a learned tutor, suggesting and sharing best practice. If so, this is certainly to be welcomed. Nevertheless, the rule book is not being torn up and indeed is likely to continue to be augmented with more sector-specific guidelines.

So New COB is not perhaps the major immediate concern that many have painted it to be, but it does mean a check is introduced that all firms' operating in the pensions market act properly and communicate openly with the regulator. Most are doing this already.

Christopher Reed
UK head of Retirement & Savings Business
MetLife Europe