The trade body for the self-invested pension industry, the Association of Member Directed Pension Schemes (AMPS), revealed their response to the Financial Services Authority’s (FSA) capital adequacy paper this week and has admitted concerns that if the proposals are implemented without change they could actually be harmful to consumers; the exact opposite of the FSA’s intention.
FSA consultation paper
The consultation paper, CP12/33, was published by the FSA late last year, with proposals designed to protect investors should their SIPP (Self-Invested Personal Pension) provider cease to trade.
The introduction to the consultation paper said: “This paper focuses on meeting our consumer protection objective by ensuring that operators have sufficient financial resources to facilitate a more orderly wind-down, if they choose or need to exit the market. Where operators do not have sufficient financial resources, it may harm consumers if the wind-down is funded by a charge on clients’ assets. Clients may also be subject to a tax charge by HMRC to realise their assets within the SIPP.”
If implemented without change, SIPP providers would be forced to calculate their capital adequacy requirement based on a number of factors, including the value of assets they hold, as well as the types of investment held in their SIPPs. The proposals will lead to the majority of SIPP providers having to hold significantly larger sums of capital adequacy, even the FSA predicts that a number will be unable to continue under the new regime and have to merge or be sold.
There was also concern that commercial property and deposit accounts, both popular investments for SIPPs, have been listed as a ‘non-standard’ asset alongside unregulated investments; effectively grouping something as mundane as a fixed rate bond, protected by the Financial Services Compensation Scheme (FSCS), with an unregulated bamboo investment in a faraway land.
The FSA asked for response to their consultation paper from the SIPP industry and last week saw the response from AMPs, who represent 82 SIPP providers.
Speaking to Investment Sense, Andrew Roberts, Chairman of AMPS, said: “We can’t support the assets under administration model as there are too many problems with it, some of which would result in less capital adequacy for consumers than the current system.”
Roberts continued: “We haven’t been provided with evidence that the actual costs of running a SIPP operation isn’t a better base for establishing the initial capital requirement, other than that the FSA are worried about some firms not allocating enough expenditure to the SIPP arm of a multi-business operation. But this latter point can be dealt with in better ways than using assets under administration.”
“Further, we do not think that the wind-down costs attributable to the SIPP operator are as high as the FSA’s model suggests, not least as running costs would continue to be collected from SIPP members during the wind-down process. Whilst there may be a group of problematic assets, most likely built up during the esoteric investment debacle over the last two years, we remain unconvinced that it is the SIPP operator that should foot the whole bill if consumers have been mis-sold unregulated investments by unregulated individuals.”
Capital adequacy alternatives
AMPs believes that the FSA proposals could lead to a range of unintended consequences including:
- SIPP operators increasing their fees to help them meet higher capital adequacy requirement
- SIPP operators moving away from a fixed fee model, which can be very cost effective for larger SIPPs, to charging based on a percentage of assets held
- SIPP operators introducing more regular mandatory valuations of assets, including commercial property which is not cheap to value, which would have to be directly paid for by consumers
- SIPP operators taking a more cautious view of non-standard asset values
- The range of investments allowed by some SIPP providers being restricted, for example to exclude fixed term deposit accounts, to reduce the amount of capital they need to hold. This would be particularly harmful to many SIPP investors, who regularly use fixed term deposit accounts, possibly forcing them into more easily accessible accounts which generally pay a lower rate of interest
In their response, AMPs has suggested two alternative calculations taking into account the actual costs a SIPP provider incurs in running their business, and the number of ‘illiquid’ SIPPs, rather than the level of assets under administration.
Andrew Roberts again: “We propose some higher requirements than the FSA were proposing: a higher fixed minimum of £50,000 rather than £20,000; and consideration of a further requirement for capital for firms that have good systems and controls, but have not demonstrated that they meet an objective standard such as ISO27001/9001.”
Roberts concludes: “In other words, there would be financial incentives for firms to have independently verified recognised standards for systems and controls, the quality of which seems to be a key concern of the FSA.”
The Investment Sense view
We’ve spent a considerable amount of time considering the FSA’s proposals and speaking with leading industry figures.
We agree that the current system, which allows some SIPP providers to hold relatively small sums, perhaps only a few thousand pounds, of capital in reserve, needs to be reformed. Naturally we also support the principle of SIPP providers being financially stable and having adequate capital reserves to cope with all eventualities. However, we feel there are some significant unintended consequences to the FSA’s proposals which could actually cause harm to SIPP investors and need to be addressed.
Firstly, the proposal to exclude UK commercial property and fixed term deposits, two very popular SIPP investments, from the list of standard assets, should be reconsidered.
If this is not changed we could see a significant number of SIPP providers increasing their charges to meet the additional capital required, forcing investors to pay higher fees. There could also be a reduction in the number of providers willing to allow commercial property and fixed term deposits into their SIPP, forcing SIPP investors to seek an alternative provider, which could mean additional advice, exit and set up fees.
It seems illogical that a fixed term bond should be classed alongside, for example overseas property, and that a third category should be set up, for fixed rate deposit accounts and commercial property, to recognise that they are vastly different to other ‘non-standard’ assets, for example overseas property and many unregulated investments.
Secondly, we also agree with AMPs that linking the level of capital adequacy required to the amount of assets under administration, rather than the number of SIPPs, should be reconsidered. The cost managing a SIPP, or indeed transferring it to another provider is not linked to the value; for example the running costs of a SIPP with £100,000 of cash deposits, shares or unit trusts is broadly the same as it would be if it were valued at £200,000. The same applies to a transfer, although there are exceptions, particularly where multiple properties are involved.
Valuing the assets held in a SIPP presents further problems. The value of many ‘non-standard’ assets will be subjective and even if this isn’t the case, the process of valuing, for example commercial property, is costly in itself. Are the FSA expecting SIPP providers to value all the property held in their SIPPs every year? The cost of this exercise would be horrendous and undoubtedly passed on to SIPP investors.
Linking assets under administration to the costs of running a SIPP provider, or indeed transferring SIPPs, is in our opinion, too blunt and could lead SIPP providers to moving to a percentage based charging model, rather than the fixed fee model currently used by most. In our view the problem needs a more sophisticated solution, linked to the actual number of SIPPs and the type of assets held and not their value.
Thirdly, the amount of capital required under the new rules seems to be out of proportion to the cost of winding down or selling a book of SIPPs and seems to take no account of the fact that fees will still be collected and some costs, for example those associated with acquiring new business, which would presumably fall quickly.
In conclusion, we believe the issue of SIPP providers holding sufficient capital to allow an orderly wind down of their business to take place, in the event it fails, is hugely important. Whilst the current system is flawed and needs to be reformed, the proposals from the FSA also require changes if SIPP investors are not to be harmed by the very rules designed to protect them.