Perverse logic from the FSA
Last month a consultation closed on the FSA’s proposals to make swingeing increases in capital that SIPP providers have to hold. Quite reasonable, you might think, given increasing capital requirements in most areas of financial services. Hardly something affecting many firms, you might think. Maybe, but the FSA’s proposals nonetheless raise an important question of principle: is it meeting an appropriate burden of proof about market failure when forcing major changes in the competitive landscape, particularly when these are expected to reduce fragmentation and increase concentration? Even if there is a trade-off to be made between fewer, stronger providers and reduced price competition, it needs to be argued, lest people think that the regulator simply wants an easier job.
By its own reckoning, nearly a fifth of providers may leave the business and a leading SIPP provider has referred to the likelihood of a ‘bloodbath’. Industry insiders are not all uncomfortable about the change, apparently, but that is not surprising if they see it as a charter for turning a fragmented business into one dominated by a handful of specialists.
Our interest in the FSA’s consultation paper CP12/33 was initially as a buyer of SIPP services for portfolio-management clients but when we came to read the paper we were troubled by the absence of reasoned and evidenced argument for large capital increases. The specific arguments in these SIPP proposals rest on the risk of consumer harm in the event of a SIPP provider winding down its business. Not only does the chance of loss by SIPP members in that case itself look very small but, if it were large, by increasing capital it is triggering the very thing it fears. Recognising that this logic might appear perverse, the FSA suggested it would rather deal with the problems in one go!
Even as customers of SIPP providers we do not know enough about firms’ business models to respond knowledgeably to all the detailed questions the FSA has asked in this consultation. But we did think the appropriate burden of proof had not been met and that worried us. So we wrote to the FSA to say so. You can read our response to the consultation here.