Plans to use self-invested personal pension (SIPP) providers' assets under management (AUM) as a factor in determining capital adequacy levels is a mistake, Dentons Pensions has said.
Last week, the Financial Services Authority (FSA) consulted on hiking SIPP providers' capital adequacy levels from a minimum of £5,000 to £20,000. It also wants to take the provider's assets under administration and the amount of non-standard assets held into account when determining capital adequacy levels.
It said the minimum needed to be raised because "experience has shown the cost of winding down an operator is unlikely to be less than this amount", it said.
Dentons director of technical services Martin Tilley said the regulator had made a mistake and was starting from the wrong position.
He said: "I think they have got it wrong again. There has to be a starting point to the discussion but here we are starting on the wrong point. A lot of their thinking is based on AUM but that does not have any bearing a lot of businesses."
Tilley (pictured) said one business could run a thousand plans worth, for example, £2m each, while another could run ten times as many with smaller individual pots but would have the same total assets under management.
Therefore, the total capital adequacy would be the same but the length of time and resources it would take to wind up the companies would be very different.
"This is an anomaly", added Tilley. "Total AUM is an irrelevant topic."
He also said increasing the need to value funds under administration for regulatory purposes would increase the cost of administration. This, in turn, might be passed on to clients.
Tilley agreed the current scenario, where six or 13 weeks of capital is held, is inadequate.
"Maybe 26 weeks should be the minimum? That is a more realistic starting position. The type of asset is relevant but not the amount. I think there will be a huge response to the consultation. This is the biggest thing that has happened in SIPPs since 1991."
He explained the industry could contract as a result of the increase as some firms would not be able to find the required capital, despite operating on a stable basis.
"That may be intentional on the part of the regulator. If that is the case, we are looking at 20 SIPP operators ceasing to exist, what will happen to their clients?"
Partner Insight: For Blackfinch, the arrival of its IHT portfolio services was a 'natural evolution' in the group's offering and points to an established track record of returning cash to investors.
Senior Managers Regime
Interest rate outlook unchaged
FCA made demands last week