Fiona Murphy asks what the FSA's capital adequacy consultation means for the SIPP industry
The FSA has released its anticipated consultation paper on capital adequacy. Industry has long debated what these requirements would involve. At an AMPS conference earlier in the year, an FSA spokesman revealed a risk based approach was likely to be adopted. However, the new proposals are slightly broader.
Currently, SIPP operators are required to hold reserves of either £5,000, six weeks of expenditure or 13 weeks of expenditure if they hold client money.
The FSA's paper identified "two significant weaknesses" in this approach. Providers' expenditure is not necessarily aligned to the size and nature of the assets they administer and some asset types are more difficult and costly to transfer during a wind-down scenario than others.
To remedy this, new proposals include firms increasing the fixed minimum capital requirement from £5,000 to £20,000. An operator's total capital requirement will include a requirement for assets under administration and a surcharge based on the percentage of non-standard assets held.
SIPP experts have broadly welcomed the further protection it offers consumers and greater responsibility for firms to account for their investments.
However, one issue they have identified is confusion around the definition of a non-standard investment.
Mike Morrison, head of platform marketing at AJ Bell says: "I think UCIS will be in that list, but if its investments that can't easily be sold, does that include commercial property?"
Martin Tilley, director of technical services at Dentons Pensions says: "The [commercial] property we [hold] is fully due dilligenced and of a high quality. We don't take on overseas hotel rooms and more esoteric [investments]. FSA has to draw a line somewhere and [define] commercial property. It seems they've decided all of it is esoteric which I don't necessarily agree with and something the industry will respond to."
John Moret, director of MoretoSIPPs adds: "I understand the FSA see commercial property as being illiquid and taking time to unravel. On the other hand, most commercial properties are sound investments. I think there will be some push back on that. Generally property has a value and keeps its value so it's going to be realisable at some point. It's a bit of a sledgehammer to crack a nut. "
However, Suffolk Life's head of marketing Greg Kingston says: "People are saying property doesn't have to be sold should a firm have to be wound up, it has to be transferred to another provider. Of course the property doesn't have to be sold but you can't transfer property as simply as a number of other assets.
"Some firms will say most are connected properties. The investor is also the tenant. It's a clean piece of business. That may be true but it's not a straightforward process to transfer a property from one provider to another.
Speed of property sale can be affected by surveys, solicitors and lenders reluctant to work with a new provider.
"You cannot say with any certainty property will be a quick asset. For that reason, we are talking about this for the interest of the investor. We as an industry have to be careful to balance what the regulator is trying to do with the needs of our own businesses and the market" Kingston adds.
Morrison says a permitted investment list, which AJ Bell has called for for some time, could allay confusion over which investments require higher levels of capital. Moret questions whether the proposals tie in with HMRC thinking over investment suitability.
Changes to business models take time and money. The FSA has calculated a one off cost of £3,750 based on a series of assumptions. Is this realistic?
Tilley says: "The cost would be significantly more than that. If you imagine there's four of us who are going to sit around a board room for two hours and discuss this at £200 an hour, that's £1,600 and we haven't even decided what we're going to do. It's a bit like the illustrations document; they've woefully underestimated the costs which again in some way will be passed onto the consumer."
The cost of calculating capital adequacy relative to assets is tricky. Moret said: "I did a back of the envelope calculation. In the example I used, for a mid- sized SIPP provider, if my maths was right I got a calculation increase at nearly ten times the current requirement."
Providers will be given a transitional year to raise extra capital, adjust their business model or exit the market. An estimated 75 providers will be affected with up to 18% likely to exit.
Moret says: "It's a triple whammy for the industry with the thematic review, disclosure and now this. If I was a small operator, I might think what's the point?"
In addition, Christine Hallett, chief executive of Carey Pensions says: "[With] the smaller ones who may have been hooking it onto their core business or even advisers who do a bit of SIPP administration, we will see that contract, but that's been on the cards for some time. With RDR coming along and this higher capital adequacy, advisers who have had an added on bit of business may want or need to revisit that strategy."
Tilley warns those exiting with a higher proportion of esoteric assets may be unattractive to firms eyeing take-overs.
He adds: "What you might find is when some exit the marketplace, their book is going to be picked off individually and the book will be wound up. That's exactly what the FSA is suggesting capital adequacy needs to protect. It may be that capital adequacy hasn't been there in time to allow an orderly windup. This is what we had with HD Sipp and Freedom SIPP where there's an appointed provider of last resort."
There will be an increase in deals and consolidation. However with other providers reluctant to buy rival SIPP books, investors may be cast adrift.
Moret agrees: "It's got a lot of unintended consequences and I don't know what the SIPP industry has done to deserve this. We know there are problems but in terms of the overall market, it's around 1 million investors, 99% are comfortable with a decent pension."
He also wonders if it really addresses the issue. "There are some operators who don't measure up through incompetence or other intentions. I'm not sure this is going to prevent operators of that type continuing until it's too late. This is all quantitative, there's a need for some qualitative work around operators as well, to an extent this is what they've come out with in the thematic review but there's more work needing to be done."
Hallett says: "We have always supported the FSA's move to ensure providers have adequate capital in place to protect clients. It's not something that should come as a surprise for the industry and one would argue they should have been preparing a long time ago.
"So far it has been different levels for different types of operators and finally we have crystallisation. Raising standards can only be a good thing in my opinion."
The SIPP industry will have their chance to voice any concerns around the finer details of the FSA's plans. The consultation closes on 22 February 2013, but will the regulator listen?
Two global vehicles
'Further plug advice gap'
Must appoint separate CEOs and boards
Advisers do come out well
Will report to Mark Till