The subject of capital adequacy for SIPP providers reared its head again yesterday, with the FSA (Financial Services Authority) saying that it may force SIPP providers, who allow riskier SIPP investments , to hold more capital than their rivals.
SIPP providers are currently required to hold capital equal to six weeks overhead as demonstrated by the audited accounts.
However for some time now the FSA has said it believes this figure is too low, as in the event of a SIPP provider failure, the process of winding up the company and organising an orderly transition of SIPPs to a new provider, would take longer than six weeks.
The FSA has been consulting on possible changes to capital adequacy regime for SIPP providers and it now seems that a link may be made between the amount of capital a SIPP provider has to have in reserve and the types of SIPP investments they allow.
Speaking yesterday at an industry conference Milton Cartwright, the Pensions and Investments Policy Manager at the FSA said: “It seems to us that the problems in orderly wind-down that we have encountered in the last couple of years have largely been as a result of the types of asset that the SIPP operator in question has held within a SIPP.”
He continued: “There is a very strong correlation between the more esoteric types of asset that are held and the ability of a firm to wind-down in an orderly manner. Six weeks has certainly proved inadequate.”
“One of the things we are looking very carefully at is the amount of assets held within the SIPP that are esoteric.”
Cartwright’s comments come after some recent high profile failures of esoteric investments, which have seen some SIPP investors lose significant sums.
He said: “There is a reputational issue for the SIPP industry here. These investments are quite often high risk, carry opaque risks and have low governance requirements.”
“But we are not in the space of stopping people investing in what they want to.”
Price increases for SIPP providers?
It is commonly accepted within the SIPP industry that the FSA will increase the amount of capital SIPP providers need to leave in their reserves.
However, if SIPP providers with a greater proportion of esoteric and unregulated investments have to increase their capital reserves still further, it is possible that some SIPP providers will need to significantly increase their fees to meet these new requirements.
This could lead to a situation where a SIPP investor using more traditional investments, sees their fees rise because their chosen provider has to meet higher capital adequacy requirements because of the amount of unregulated or esoteric investments they have allowed into their SIPPs.
Of course SIPP providers could simply put up the fees for the SIPPs which hold these types of investment, whilst others will be confident that their current reserves will be sufficient to satisfy any changes required.
Only time will tell how far the FSA will push up the amount of capital SIPP providers need to keep in reserve and what impact this has on SIPP fees.