I have been fortunate to experience a number of different types of Sipp acquisition. These range from open and consensual exploratory processes, to distressed purchases with limited information and mere hours permitted to analyse. I have also been on the receiving end, as was the case when Suffolk Life was acquired by Curtis Banks.
These differing deals have brought different challenges, notably from a due diligence perspective. But the experience is highly relevant to advisers looking to conduct their own due diligence on Sipp operators.
That process has never been more important than today. With some urgency, advisers should consider fresh due diligence exercises on the providers used by both new and existing Sipp clients.
What has changed in the Sipp landscape? A number of risks, most often related to the manner of acceptance and type of non-standard assets, are close to boiling over.
There are reports of legal action against a number of Sipp providers. With the regulator seemingly offering evidence in at least one of them, it may be that the margin of flexibility offered by past and current regulation is sharply defined in court.
Claims management firms are already turning their attention away from payment protection insurance (PPI) to Sipps. They will be watching the cases with as much interest as providers. The Financial Ombudsman has even had to deny it is deferring a decision on a number of cases pending the rulings.
Although a measure of consolidation has already taken place in the Sipp market, what has changed is the book quality of the remaining smaller, weaker providers and the risk appetites of the larger acquisitive Sipp providers. The risk of Sipp operators winding up without a buyer to rescue them has already begun to manifest.
Advisers will not need to be reminded of the consequences of having a client with a Sipp operator that fails. These include loss of control over retirement and investment options for the months under an appointed administrator and potential scheme sanction charges on their clients’ funds.
It may pay to review and move clients now, and there is plenty of evidence to suggest some advisers are beginning to do just that. The importance of Sipp due diligence has now filtered down to clients too, so advisers can expect questions.
Forensic due diligence is far from making a recommendation based on product features and price comparison. It needs to comprehensively analyse the integrity, financial stability and risk controls of a Sipp provider.
A statement from the Sipp operator confirming it does not accept non-standard investments is worthless if you do not dig deeper. Did it take on high volumes of unregulated collectives just a couple of years previously?
Be on the lookout
Based on our experience of Sipp acquisitions, here are five factors to help identify the inherent areas of risk in a Sipp operator:
1. Consistent profitability. Privately owned operators have more ‘flexibility’ on their level of disclosure, but the profit and loss account should be accessible. Look through the past five years of accounts, and question any significant deviations in income, expenses, and both gross and net new business. This is a good place to start.
2. Non-standard assets. The trigger for needing to hold additional capital should also trigger further questions. What proportion of Sipp investors hold non-standard assets? How many non-standard assets does the Sipp provider hold in total? How many have a zero value or are subject to claims under the Financial Services Compensation Scheme? How did these assets arrive at the Sipp operator: advised, non-advised or as part of an acquisition?
3. Illiquid plans. These are Sipps that are normally invested in one or two assets that have become illiquid: unrealisable for cash or not transferrable. With no cash balance in the Sipp, the Sipp operator cannot take an income (at least for cashflow purposes). In some (but not all) cases, a poor-quality investment may sit behind the illiquid asset, as well as a disgruntled investor, an absent adviser or no adviser at all, and a potential claim waiting to happen.
4. Capital requirements. This should be common ground for advisers today. The basics will be a review of the capital requirements, how much capital the provider holds and how that capital is funded (tier 1 cash or riskier tier 2 debt or other financial instruments)
5. Complaints. Review the level of complaints and the uphold rate. Review the referrals to an ombudsman, and the uphold rate for those. As the claims management companies drive higher numbers of referrals to an ombudsman, the upheld rate is more telling than the number of referrals themselves.
There are many other areas to examine. But if you are not a regular user of full Sipps, these five areas are a good starting point.
If the answers to these questions do not add up, you should ask more detailed questions. If there are still concerns following this, there is enough quality choice remaining in the market to look elsewhere.
These options are exactly the same for a Sipp provider considering an acquisition. In both cases, there will always be a measure of risk in the firm you are looking to recommend or acquire. It is just a case of whether you consider it an acceptable risk.
Some Sipp operators do not know where some of their clients’ assets are invested. We have seen this in more than one of our own acquisitions, despite the fact Sipp operators have been obliged to provide quarterly returns to the regulator for the past 18 months. More than 15 Sipp operators were unable to correctly complete that first regulatory return, and a number provided no return at all.
Reviews for all clients with a Sipp should be a high priority for advisers in the second half of 2018.
Greg Kingston is group communications director at Curtis Banks Group