FSA stringency on Sipps will hurt smaller players

The FSA’s plans to increase capital adequacy requirements for Sipp firms could drive further consolidation in the market as small providers struggle to compete under the new regime.

Last week Money Marketing, Fundweb’s sister-publication, revealed the regulator has started alerting providers about its plans to increase the amount of capital that Sipp firms need to hold as the products become more mainstream.

Currently, Sipp providers are required to hold reserves equal to at least six weeks of annual audited expenditure.

Suffolk Life head of marketing Greg Kingston says he expects the regulator to increase the level to 10 weeks of annual audited expenditure, with a view to further raising the bar to 13 weeks by the end of 2013.

He says: “Our legal structure dictates that Suffolk Life is required to hold capital of 13 weeks of annual audited expenditure, whereas the current requirement for some other Sipp firms is just six weeks.

“But Sipps are no longer a niche product, so it was inevitable that providers would have to adhere to increased regulation. It is likely, however, that this move will hurt the smaller players in the long run and could fuel industry consolidation.”

Last week, Money Marketing revealed Sipp specialist Hornbuckle Mitchell is searching for an external investor amid fears that the capital adequacy rise will hinder its growth plans.

Managing director David White says: “The FSA is right to do this because six weeks is not sufficient to wind a company down if there is a major issue.

“This will put pressure on the smaller Sipp providers and consolidation will accelerate. I think the FSA would like to see the number of providers reduce from 120 to about 20.”

Hargreaves Lansdown head of pensions research Tom McPhail says increased regulation in the Sipp market was inevitable, given the increased popularity of the products.

He says: “It is appropriate that the FSA is doing this but it is likely to put pressure on specialist Sipp operators. Larger operators, wealth management firms and the big insurers will be able to absorb this, but for smaller firms whose principal activity is Sipps, it could have a big impact.”