The FSA (Financial Services Authority) released proposals last week which, if implemented, could lead to bespoke SIPP (Self Invested Personal Pension) providers having to hold significantly higher reserves of capital.
The FSA has decided that current rules do not provide adequate protection for customers should a SIPP provider fail. Under the new rules, providers will have to set aside more financial reserves. These reserves would be called upon to pay for the winding down, or transfer, of their SIPPs, in the event that their business fails.
Most bespoke SIPP providers maintain reserves of capital of at least 13 weeks’ expenditure, though some only hold six week’ worth due to their business structure. The new proposals will introduce a level playing field, with the reserves required to conduct business based on the total assets held by the SIPP provider, with an additional amount dependent on the number of customers who choose to invest in non-standard investments.
In total, the FSA calculates that the SIPP industry will need to increase their reserves by between £12 million and £54 million. One compliance consultant believes that one SIPP provider will have to hold 30 times as much in reserve under the new proposals.
Whilst the subject of capital adequacy might seem relatively obscure, the new rules, and the way in which SIPP providers implement them, will directly affect all SIPP investors.
We wanted to gauge the reaction from the SIPP industry to the new proposals, so caught up with Andrew Roberts, Partner at SIPP provider Barnett Waddingham.
How will the new rules affect the SIPP investor?
Andrew said: “Setting aside more money should your business fail will increase consumer protection, but I expect that there is sufficient protection already for the majority of SIPP investors. For them, the proposals are likely to translate into higher charges, as holding additional capital costs money.”
Andrew continued: “SIPP providers will be reviewing their business models and this may cause some unease too. Some providers will look to exit the market, some may change their business structure and some may restrict investment choice to standard investments or sell of part of their business. There will be immediate concern for SIPP investors with providers who are at risk of exiting, but I would expect that low cost transfers will be offered and/or the business sold as a whole.”
“For new SIPP investors, there will be fewer providers to choose from, as it is almost certain that some providers will exit the industry in the next 12 months. The FSA is predicting that 75 SIPP providers will have to hold more capital, with a dozen or so leaving the market as a result. They will be hoping that those choosing to exit are the ones that were putting SIPP investors most at risk, and that enough providers continue to form a competitive market.”
Commenting on the proposals, David Geale, head of Investment Policy at the FSA, said: “We will look closely at how they are making these changes, but they have a year until the rules come in.”
“We have to start somewhere. Some firms may decide to leave the market but the whole point of the proposals s to protect consumers. Therefore it will get to be difficult for some but we have to move forward.”
Has the FSA got the definition of ‘non-standard’ assets right?
Under the new proposals SIPP providers with exposure to ‘non-standard’ assets will have to hold additional capital – up to six times as much for a provider whose investors all hold non-standard investments compared to if none did. This is because the regulator believes, probably correctly, that such investments take longer to dispose of or transfer to an alternative SIPP provider.
The term ‘non-standard’ assets conjures up a picture of exotic and probably unregulated investments, but surprisingly, and somewhat controversially, the FSA has included UK commercial property, a hugely popular SIPP investment, in this category, as property cannot be liquidated quickly.
Reacting to this, Andrew said: “It hasn’t come as a surprise that the FSA are linking capital adequacy requirements to holdings of non-standard investments and there are sound reasons for this. I did not expect, and do not agree, that UK commercial property should be treated in the same way as other non-standard investments such as unregulated funds that invest in biofuels, or shares in unquoted companies.”
“The same comment applies to (investment grade) Gold Bullion which meets the criteria for a standard investment and so should not be controversial to include as standard.”
“Whilst commercial property isn’t quickly tradable, UK-based properties are a staple investment of traditional investments and SIPP providers would not usually be concerned by taking on a portfolio of SIPPs containing such investments.”
Andrew concludes “This differs radically from taking on a portfolio which includes lots of UCIS (Unregulated Collective Investment Schemes) for example. If the FSA are to pursue the concept of linking capital adequacy to assets under administration rather than expenditure, I would hope that a simple tweak could be applied to deal with this issue. If UK commercial property cannot be treated as standard, then it should at least be treated in between standard and non-standard.”
The David Geale, again: “Including commercial property does not unduly affect SIPP providers. We are not saying it’s a risky investment but it’s about the ability to wind down.”
What other issues could the new rules create?
Other than the obvious concern for some SIPP providers of how the additional capital will be found, we asked Andrew whether the new proposals would cause any additional problems for SIPP providers.
“The rules require SIPP providers to know the value of assets under administration and what percentage of plans are invested in non-standard investments. Whilst this sounds easy and you might expect providers to know this already, there will be some (small) hurdles to get over.”
“The terms standard and non-standard investments have not been used before and so to get the required percentage out of an existing admin system will be awkward initially until the system is upgraded or perhaps data logged in a way that will facilitate this.”
Andrew continued: “Valuing assets under administration might seem to be simple, but ‘non-standard; investments are often difficult to value and (or) not valued often by definition, and so there may need to be guidance on, say, how recent a property valuation has to be for the calculation to work or what value to place on a suspended property fund.”
Concluding Andrew said: “Assuming the SIPP operator has these pieces of information, the calculation appears simpler than the current process which I am told requires knowledge of 900 pages of source material. This might be one factor contributing to the recent findings by the FSA that there was a poor understanding of their requirements by senior management.”
Whilst most people have welcomed an increase in the reserves that need to be held by SIPP providers, especially if they lead to better consumer protection and a more stable SIPP market, there is certainly concern amongst UK SIPP providers that UK commercial property has been included in the ‘non-standard’ asset class and some disbelief that such huge increases – driven by its inclusion -are necessary.
SIPP investors will also have to watch out for an increase in SIPP fees as providers look to find ways of meeting the new funding requirements. At the same time competition amongst SIPP providers could be affected, if more than the predicted numbers are forced to withdraw from the market.
The full consultation paper can be read by clicking here.
Our team of Independent Financial Advisers in Nottingham are experienced in advising SIPP investors, if you would like to discuss the FSA consultation paper and how it affects you call one of our IFAs today on 0115 933 8433, alternatively enquire online or email firstname.lastname@example.org