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The Slippery Issue of the SIPP Skim

I find it interesting that providers who indulge in this practice seem, in part, to be using the prevailing low interest rates as justification for the practice.  Are they, in part, therefore suggesting that it was less palatable when the interest rates were higher but ok now they are low?  Surely the issue is transparency and earning money from not actually doing anything rather than the size of the skim?

Well, not according to the usual suspects keen to defend the practice.

A typical argument from such providers is that:

"A provider may receive an interest rate of 5% and pass on 2% or 3% of that. This seems fair. This interest is the result of a business deal, and doing away with this benefit will rankle with some SIPP providers. Concerns around this practice are overstated and often part of a viable business model."

Is it ‘fair’ that a provider which has already charged their client a fee for a service should then receive additional revenue from their client’s money sitting in a bank account? A viable business model and an ethical one are often two distinct things. Let’s not allow the former to cloud the latter.

Some providers are arguing that fees can’t be wholly transparent upfront due to the complex metrics of working out the lifetime cost of a SIPP – justification to charge by the back door? How about having an honest and open set of fees and a regular line of communication with your client? Works for us.

 

[Sponsored article by The Pension Solutions Group]

   

Author: LifeTalk Admin (Bella)
Posted: Thursday, December 15, 2016 | 12:46:02 PM


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Comments

04 January 2017 | 8:46:13 AM  Martin  Tilley wrote:
Whether or not a Sipp operator should receive a trail income from a default bank account and how they should disclose it if they do has been a topic of discussion for many years. But it has risen in prominence in the run-up to the capital adequacy overhaul that is effective from September this year.
One industry commentator has suggested the FCA is set to “ban interest being creamed off by Sipp providers” and that if this happened “the entire profitability of the bespoke Sipp sector can be wiped out completely”.
While cash bank trail has historically been a key source of income for some Sipp providers in years passed, this will have waned over more recent times with the reduction in the rates payable by the banks, and business strategies will have taken this into account. For some, fees may have risen already; for others, increases may follow.
Bespoke Sipps, however, usually receive a substantial part of their remuneration though the levying of direct fees for the work they do in relation to the non-standard or esoteric assets they accept. These assets require a high degree of human involvement to service. This charging structure could be argued as being more relative to the work undertaken than a platform Sipp whose percentage of fund fee is often not representative of the human cost incurred.
Some Sipp providers are not reliant on bank trail income for profitability at all and to suggest the entire bespoke sector could be wiped out is unrealistic.
Taking a step back, is inclusion of bank trail as part of a business remuneration strategy such a “dirty” proposition as it is made out to be? Again, historic practices and non-disclosure may have led to this being the case but following the drops in rates payable by the banks and the FCA requirement for trail income disclosure, this can be argued as no longer being the case.
Let us assume “the bank” has a pension scheme account available to the open market, which has a published interest rate applicable of 0.2 per cent per annum. A direct client would expect to receive this level of interest on monies held within their Sipp.
However, an established Sipp provider may, through the course of having invested heavily into a marketing and service proposition, built up a portfolio of 4,000 Sipp clients and as a result may have accumulated substantial cash deposits under its administration. In the same way as a retailer may offer discounted terms when items are bought in bulk, the bank might offer the Sipp provider an enhanced interest rate for the clients it introduces.
Let us assume this is a total rate of 0.4 per cent per annum. The Sipp provider might then choose to share this enhancement with its client, passing on a rate of 0.3 per cent per annum and retaining 0.1 per cent per annum. In such a situation, the client is benefiting from getting a higher rate than could have been obtained directly on standard terms and the Sipp provider is able to use the enhancement it has negotiated as payback for the investment it has made in building up a bulk client portfolio.
I cannot see an argument that a Sipp provider is “creaming off” something to which the client was not initially entitled.
Further confusion may have been added to the issue by the FCA consultation, which concluded any interest rate trail could be a charge to the client and should be included in projections, effect of charge tables and reduction in yield calculations.
Taking the above scenario, the misunderstanding of this thought process becomes clear. The client is not 0.1 per cent per annum worse off as a result of the provider interest retention but 0.1 per cent per annum better off as result of the provider’s actions. A charge can only be evidenced if the rate passed on by the provider is lower than the published rate that could have been achieved directly by the client.
In some instances, particularly where the Sipp provider had not been remunerated partly as result of an interest rate trail, a higher direct annual or transactional fee may have applied on which VAT would have been chargeable, which when paid from the Sipp fund could have made the client worse off. For this reason, I think it might be difficult for the regulator to impose an outright ban on interest trail, as that in itself might be of detriment to the client.
The situation can be mitigated in many circumstances, particularly where the Sipp operator permits the client to open alternative banking facilities that might yield higher rates of interest, in which case any “charge” that could exist would be voluntary.
For intermediaries selecting appropriate Sipp providers, the rate of return payable on the default bank account will be a consideration, as will the firm’s business model and financial stability. Yes, it is true there might be fewer providers going forward. But there is still demand and the bespoke market will continue to exist.

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