The word ‘consolidation’ has been used with remarkable regularity in recent years. But despite a flurry of acquisitive activity a couple of years ago, the frequency and size of deals has diminished to the point of near stagnation in recent months.
Let us examine why this might be. To understand this, it is perhaps wise to consider why consolidation has been, and may again be, necessary. It should be made clear that here we are dealing primarily with Sipps operating in the non-platform area of the market. While consolidation in the platform marketplace to increase assets under administration is of course desirable and probable, such transactions are less likely to materially impact the underlying client.
A trigger to consolidation was the individual regulation of Sipps, by what was at the time the Financial Services Authority in 2007. It was at this juncture that the Sipp market was allowed to expand by permitting any firm who could demonstrate competence to be regulated to operate Sipps.
This was initially good news for consumers. Additional organisations competing for the same market resulted in innovation of product and market forces driving down fee levels. However, as advisers will know, cheap is not always good. The industry’s reputation for service suffered, as did the attention some Sipp operators gave to the acceptance of certain asset classes within their book.
It was primarily as a result of the latter that one or two failures occurred of both investments and Sipp operators. That resulted in the regulator (the FSA and its successor, the FCA) tightening the standards in successive thematic reviews followed by the review and increase of capital adequacy requirements. The latter will be introduced effective from September 2016.
The regulator in its own documents originally suggested that the capital adequacy changes alone might result in 14 to 18 per cent of providers exiting the market, although this was later revised down to around 10 per cent as a result of later softening of the requirements.
However, if coupled with the more stringent requirements surrounding asset acceptance, with the inevitable cost implications, it is easy to see the pressure on the Sipp operators.
Other factors have also risen. From July of this year, tapering of the annual allowance will impact earners of £110,000 and above, and this could result in the reduction of interest and contributions at the top end of the market, which will impact future new business.
At the same time the government has launched the Green Paper consultation investigating the incentive to save – which heavily features questions surrounding the future of tax relief on pension contributions, particularly towards the top end of the market, which traditionally favoured Sipps.
We can see that consolidation within the market would be a logical conclusion. Some commentators have suggested that the number of Sipp providers could reduce to as few as 50 by 2018, but why the lull in recent activity?
Some firms whose Sipp activity was not core to their business have already taken the jump to exit the market. Other “clean” books of business were snapped up at an early stage.
