The FSCS has raised the prospect of a levy on Sipp providers, leading Martin Tilley to speculate on what it could look like and how it might work in practice.
The Financial Services Compensation Scheme (FSCS) is to introduce three new supplementary levies to meet ‘unforeseen’ compensation costs resulting from an increase in what they call “SIPP claims”.
In its Plan and Budget for 2017/18 the FSCS suggested this could result in a levy on SIPP providers and referred to the regulator’s concerns where SIPPs had accepted business from non-authorised intermediaries. A consultation issued late last year by the Financial Conduct Authority (FCA) suggested “the burden to fund the FSCS does not currently fall equally on product providers and advisers”.
It is really important to remember that product providers already contribute to the FSCS but this is only triggered once other funding, including that from intermediaries, is exhausted.
Each time there is an industry article on the FSCS levies, it is followed by adviser comments about the inequality of the system, highlighting how the good advisers are forced to pay for the bad ones and how regulatory failure has contributed to the problem. As many of us do, I read the comments and I have to say some do have merit.
The complaints that are referred to are rarely in connection with the SIPP product itself – more usually being in connection with the failure of the investment within it, or indeed the investment advice that led to the purchase of the investment.
There have been many arguments over the past three or four years about what responsibility the SIPP provider holds in connection with the acceptance of assets within its book. The performance of the asset is of course beyond the remit of the SIPP provider, but its actions in accepting bulk cases – perhaps from unauthorised intermediaries – has been called into question.
The Pension Ombudsman and latterly the Financial Ombudsman (FOS) have taken differing views when coming to decisions but there is growing evidence the FOS is taking a much harder line with providers.
In the same way almost three-quarters (73%) of all SIPP-related claims are apparently emanating from four intermediaries, we have already seen several SIPP providers claiming any such levy should be aimed at the guilty. These SIPP providers are, in the main, those that regularly sought out and accepted non regulated business and who have regularly graced the Ombudsman’s desk.
How to impose a levy?
So let’s think about how such a levy might be imposed. There are a number of options available, such as looking at the total value of business written. This could be based on the value of contributions and transfers received into the SIPP plans, which after all are the funds potentially at risk.
Perhaps it should be based on the total number of products that are sold. This would certainly benefit the providers with fewer new products, who are likely to be the bespoke providers with higher-valued SIPPs, at the expense of the larger providers with lower-valued ones.
It has also been suggested the levy be based on a product that is considered ‘high risk’. This would be difficult to quantify as, for instance, a deferred SIPP has the ability to invest widely but might never do so.
All things considered, I cannot see how a levy could accurately reflect the guilt of any provider, nor discriminate between categories of non-standard investments, which it could be argued carry different probabilities of risk and loss.
Instead I expect any levy will be placed upon the industry as a whole, based perhaps upon the value of assets or the number of SIPPs without regard for the investment content. This will undoubtedly have the platform SIPP providers scrabbling to distance themselves from the full or bespoke SIPP market.
And despite the wish to avoid a product levy, that is precisely what we are likely to see. Time will tell.
Martin Tilley is director of technical services at Dentons Pension Management
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