SIPP capital adequacy
So, finally the SIPP industry will see the new capital adequacy rules come into force on 1 September 2016.
I was on the AMPS committee at the time the consultation started and, believe me, this was not an easy one. The FCA’s basis for calculation was questioned right from the start, with a number of alternative suggestions put forward.
Whilst the FCA did not fundamentally change the basis of calculation, it did take on some feedback from the industry. In particular, the impact on smaller providers was softened a little. We also saw some late but welcome clarification on definitions which I will touch on later in this article.
The starting point for the consultation was that the FCA was concerned that insufficient capital was held to deal with situations where a SIPP operator was being wound down and the pensions needed to be moved to another firm.
After much negotiation we got the final rules – the required capital would be calculated with reference to two factors. The assets under administration of the provider and the proportion of SIPPs holding ‘non-standard’ investments. The minimum requirement would be £20,000. Non-standard investments were defined by exclusion from a list of ‘standard’ asset classes - although standard assets that could not be readily realised within 30 days also had to be treated as non-standard.
A key issue was that commercial property was initially deemed to be a non-standard asset!
In August 2014 the FCA reclassified commercial property as a standard asset, provided that certain conditions were met – in effect commercial property should be classed as 'standard' if it could "be transferred normally in no more that 30 days”. It would be down to the SIPP operator to decide whether it could meet the 30 days requirement.
Firms will be able to consider whether the transaction can be concluded within that time limit “in the ordinary course of business" and the 30-day period is viewed as running from the date the transaction is initiated until the date it is concluded. It can still be considered standard if the 30 days rule is only likely not to be met because of delays caused by third parties.
The FCA left us with the comment "the right policy principle has been set, and it should be for the firms to consider this within common practices for the specific asset market".
The same clarification confirmed that a DFM portfolio will be treated as ‘standard’ as long as the underlying assets were also such.
So what are we to make of this? Well the first point, I suppose, is “rules is rules”, but we are left with a degree of subjectivity and provider interpretation. At A-Day providers were left debating some aspects of the definition of ‘taxable property’. Now the positioning of commercial property is to be treated similarly. Let’s hope that the FCA does not use this against SIPP operators after the event!
The softening of the effect of the capital requirements on smaller companies is, in one sense, good news as we did not want to be in a position where the capital adequacy requirements were driving disorderly exits from the SIPP market.
Potentially less welcome was the prospect of mergers, takeovers and potentially rising fees. All have been in evidence.
We have also seen that the capital adequacy rules are just part of the ongoing SIPP regulatory regime. In addition we have had thematic reviews, a focus on due diligence and a growing number of Ombudsman decisions.
For me the key issue is that SIPP operators must have a business plan – they must understand their market, understand how they differentiate and add value!
Big or small, there is room for well-run, knowledgeable, professional firms.