While the subject is harder to get to grips with than, say, capital adequacy requirements, it also has a far more direct and material effects on you and your clients.
The FCA and its predecessor have taken an increasingly keen interest in this subject during the past two and a half years. They use three little words that may not have fully caught advisers’ attention: “systems”, “controls” and “MI” (‘management information’). They each crop up around a dozen times in FG13/8, ‘A Guide for Sipp Operators’. What do they mean and how does it affect you?
Systems
System capabilities affect you. Think of the data you may want: for example, income payments and dates, contribution history, or a percentage of the lifetime allowance used at previous benefit crystallisation events. Gaps in old systems may be bridged with tools like Excel or the data you want may be in spreadsheets rather than in the back-office system.
Automation can deliver significant benefits: fewer opportunities for error, faster servicing times, fewer staff required and lower costs. There can be negative consequences, though. Staff can feel like battery chickens, increasing staff turnover and shrinking the retained experience. It is not always economical or practical to automate everything.
There is also a trade-off between automation and flexibility that goes right to the heart of an operator’s proposition. Eliminating certain manual interventions is highly desirable. However, others may give flexibility to the product, investments or service. If the system is configurable, the operator then has to decide when it is going to allow ‘Computer says no’ to be overridden. This additional flexibility adds value for you and your clients but it also adds risks and costs to the operator. Does the operator draw the line where you want it?
Controls
“Controls” was the most cited of the three words. It refers to preventing things from happening that should not happen or ensuring that things that should happen do. In terms of prevention, controls should stop, for example, drawdown income from exceeding the maximum limit or protection being missed at BCEs. On the other hand, controls ensure, for example, that your clients receive annual statements and statutory money purchase illustrations each year, that money is transferred to an investment manager, or that adviser charging (and the operator’s own fees) are paid.
Controls are dependent on data being in the system and in an available form. Take, for example, receipt of a pension share on a previously fully vested pension, which is recorded by the operator only on paper or in a comment on the system. When the recipient of the pension share comes to draw benefits, the control preventing a further PCLS being paid rests with the skill and diligence of the member of staff. A system-built control, unlike the human one, always remembers, always checks and is never tired, rushed or distracted. Such controls are a great back up to advisers and can prevent many potential faux pas.
