It’s been common knowledge for quite a while that many SIPP providers do not pass on the full rate of interest they receive on cash on deposit to their plan holders. Every now and then this story does the rounds. Now, the FSA have joined in within their Product Disclosure consultation paper CP11/03. Should you care? Infuriatingly, it’s not quite as easy as “yes” or “no”.
First off, surely no one is choosing a SIPP provider for their clients solely based the rate of interest paid on deposit. It would be a bit like buying a car based on the colour alone – it’s not that it doesn’t count, just that there’s an awful lot more to be thinking about (and that awful lot more is probably also an awful lot more important).
Second, cutting off your nose to spite your face is rarely a good policy. If Provider X pays a higher interest rate on the same balance than Provider Y, there’s your answer! If X is in fact receiving a higher interest rate turn than Y, then they are doubly smart.
The suggestion that interest turn is some kind of rip-off smacks of sensationalism. SIPPs generally come with “free” banking, albeit that there may be charges for certain services like CHAPS payments. Of course, it’s not really “free” – it costs money to provide a bank account and the interest turn defrays the cost.
So should you just not care at all?
Well, I wouldn’t go that far. According to trade press articles, some providers certainly used to receive up to 30% of their fee income from interest rate turn. Furthermore, in many cases interest turn was doing more than just defraying the cost of banking: other charges may have been lower as a result. That makes price comparison much more difficult.
So what’s the answer?
With interest rates now at 300 year lows, the turn has been reduced or even eliminated. You might wish to satisfy yourselves as to how reliant the SIPP providers you deal with are, or were, on this. Some reliance won’t be unusual but if they need to take some compensating action to ensure their long-term profitability, have they?
I agree with the FSA that interest rates ought to be clearly disclosed – alongside fees seems a good place. Providers should also disclose if they receive an interest turn so it’s out in the open. The amount of the turn, however, may be awkward to calculate. Assessing its role in a pricing model, its impact on other fees and its sustainability is proper fiendish stuff (stuff for the FSA to worry about). Dragging the client through such complexity over what is probably one of their smaller considerations does not seem to be doing anyone a favour.
The FSA talk pretty tough in places in the paper, particularly on providers’ fiduciary duty. At its strictest interpretation, that could oblige providers to pass on interest in full. That could see other SIPP charges rise if it hasn’t happened already. Costs should be slightly easier to compare though. But then, how many things do you buy on price alone?