As the FSA prepares to increase the capital requirements for SIPP providers, Ian Stott, client services director at The Consulting Consortium, assesses the implications for advisers.
The rapid expansion of the self-invested personal pension (SIPP) market and the failure of a number of scheme operators have placed the SIPP industry under increasing scrutiny by the regulator.
At the end of 2012, the Financial Services Authority (FSA) published a new consultation paper (12/33) which, if it remains broadly the same in finalised guidance, sets to impose tighter financial resources constraints on SIPP operators, more aligned to the size and nature of assets under administration.
The FSA believes the current capital adequacy framework is not sufficient to support orderly wind-down, in terms of costs or timescales, in the event that a SIPP operator fails. Currently, under these circumstances, if the operator holds insufficient funds to deal with a wind-down, investors’ capital is put at risk to meet the costs and the client may also incur tax charges.
A capital idea?
Given this clear risk of customer detriment and, in light of the changes in the structure of the market, it is reasonable that the capital adequacy structure for SIPP operators is reviewed.
Scope of the proposed changes
The FSA’s consultation paper – A new capital regime for SIPP operators – proposes increasing the minimum amount of capital a SIPP operator must hold from £5,000 to £20,000 (this amount is likely to be the minimum cost of any wind-down).
Further to this, the FSA proposes that an operator’s total capital requirement should also be made up of two further elements:
• An initial capital requirement based on assets under administration (AUA); and
• An additional surcharge to be calculated based on the percentage of underlying schemes that contain ‘non-standard assets’.
The initial capital requirement represents the capital that all operators will need to hold against the ‘standard asset’ types held within their schemes. Standard assets include cash funds, corporate bonds, unit trusts, investment trusts, ETCs, gilts, OEICs, shares listed on AIM, LSE and recognised overseas exchanges.
The existing framework also fails to take adequate account of the value and nature of the AUA, that some asset types are more difficult and costly to transfer in the event of a wind-down, and does not properly account for the risk to consumers.
An additional surcharge will therefore be calculated based on the percentage of underlying schemes that contain ‘non-standard assets’. Non-standard assets are defined as assets which would incur additional time and cost should they need to be transferred to another operator; for example, unregulated collective investment schemes (UCIS).
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