James Jones-Tinsley column: Time for Sipp firms to resolve long-running issue with FCA.



Last October, the FCA released a consultation paper entitled pension reforms – proposed changes to our rules and guidance.
Following the pension freedoms, which came into effect from 6 April 2015, preceded by the FCA’s last-minute second line of defence pontifications, the paper set out its expectations about how the existing rules and guidance operate in the new pensions environment.

It also brought forward proposals for further changes to the Handbook - which makes War & Peace look like a pamphlet - and invited answers to 40 questions that were included within the 139-page tome.

Although the closing date for submissions was 4 January 2016, there is plenty to digest in the paper. For Sipp operators, Question 11 is particularly noteworthy.

It asks: Do you agree with our proposal to clarify that Sipp retained interest charges should be included in projections and charges information? If not, how would you suggest we level the playing field for disclosing charges between Sipps and other pensions?

The whole issue of retained interest charges – colloquially referred to as a ‘turn’ – is nothing new.

For years, it has been common practice for Sipp operators to keep a share of the interest received from banks on client cash deposits, particularly where the Sipp operator negotiated a special deal with a banking institution for a higher return, based on projected or actual business volumes.

The monetary implications of this practice are not insignificant. In the paper, the FCA states: “On average, 10% to 12% of Sipp assets are held in cash accounts...[and]...We estimate that the industry earns about £60m a year from retained interest charges.”

What has stoked the FCA’s ire, however, is their claim in the paper that disclosure of this retention by the Sipp Operators, “is not being included in projections, effect of charges tables and RIYs [reduction in yield figures]”, despite Sipp operators being brought into the disclosure regime in 2013; meaning they are required to provide Key Facts Illustrations to prospective clients, in the same way as other pension providers.

The FCA’s disclosure requirements also mean that Sipp operators have to treat any retained interest on cash accounts as a ‘charge’ and therefore requiring this to be included in projections, effect of charges table and RIY measure.

However, the FCA state that because “some firms are not including the retained interest charge in Sipp projections and charges information”, the result is that “projections are overstated and charges are understated”, which “makes Sipp illustrations look more attractive...potentially giving Sipp operators an unfair competitive advantage”.

As a result, the FCA is proposing to modify their rules to ensure that retained interest charges are sufficiently disclosed in all relevant documents, to enable consumers to compare charges consistently across different pension types, and enable firms to compete more equally.

The irony is that, as the FCA’s focus on retained interest charges has increased, the actual ‘turn’ received by Sipp operators has steadily decreased, through a prolonged environment of low interest rates; a phenomenon that will be exacerbated further following the introduction of the “Basel III accord”, with effect from 1 January 2016.

Basel III is a global regulatory framework, designed to ensure liquidity within the banking sector. The new accord requires banks to hold 100% of instant-access cash and make it available within 30 days.

As a result, banks will no longer be able to loan instant-access cash held on behalf of Sipp operators, and the subsequent restriction on this revenue stream means that banks are less likely to offer Sipp operators – and their clients – preferential terms on deposit accounts.

An extreme - albeit viable - outcome could be that Sipp Members may receive nil rates of interest on cash deposits, going forward, with little or no margin then available to the Sipp operator.

Under such circumstances, the increased retained interest charges disclosure requirements demanded by the FCA in their Consultation paper effectively become meaningless.

For Sipp operators, it’s now our turn to resolve this long-running issue with our regulator.