The French Revolution did not just overturn the social order across the Channel – it literally reset the clock. Amid the chaos and bloodletting, the leaders of the Revolution renamed the months and the calendar started from scratch.
In 21st century Britain, the Sipps industry is fast approaching its own year zero. Fortunately, Madame Guillotine has long since retired and while there is no prospect of public beheadings this time, many in the industry quietly fear a period of immense upheaval.
We know neither the full details nor the date they will come into force, but it is already clear that the FCA’s long-delayed new rules on capital adequacy for Sipp providers will be a game changer for the industry – both in the short and the long term. They may impact most in areas where one would least expect it, shifting the balance of power and forcing some providers to change the services they offer and the fees they charge.
For both large and small Sipp providers, the most immediate and noticeable impact will be in the introduction of higher capital adequacy requirements. This means many providers of all sizes will have to hold more capital in reserve.
This additional capital will have to come from somewhere, and if a provider cannot get hold of the required funds easily they will be forced to generate it by other means. For many, the easiest options will be to increase client fees, or to withhold some of the bank interest paid by clients’ Sipp current accounts.
But those providers who are trading on very thin margins may struggle to raise enough extra cash quickly enough – and could be driven out of business.
It is tempting to think that smaller firms would feel the burden of the new requirements most keenly. Certainly some of the larger providers have been smugly warning that the capital adequacy rules will squeeze smaller firms more than them.
But such a smugly sweeping generalisation is nonsense. In fact, some large providers have a lot to fear. Size alone is no guarantee they have an abundance of spare capital to use for these purposes, or of higher profit margins.
In fact, larger companies often spend proportionately more on infrastructure and staff – and could find it very expensive to change systems and update their fee schedules.
By contrast the best run small firms are more nimble and should be able to make changes without such upheaval. But then again, with a smaller pool of clients, their ability to raise extra capital by raising fees is more limited.
The current capital adequacy regime is based on a firm’s expenditure and running costs. Generally speaking, larger providers have larger running costs and hence a higher amount of capital in reserve.
Under the proposed new regime the size of the company will still have an impact. But what will matter will be size in terms of the assets under administration - and the higher that is, the more capital the firm will need.
