As the capital adequacy argument continues to rage in the SIPP industry, Mike Morrison looks at the key issues.
I was at a SIPP conference recently and the main talking point of the morning was the proposed capital adequacy regime for SIPPs as outlined in the FSA consultation CP12/33.
Now, I have been working in the SIPP arena since 1990 (when the first SIPP launched) and find it hard to think of an issue that has raised so much comment and discussion.
The capital adequacy proposals place certain requirements on SIPP operators in terms of the amount of realisable assets they must hold at any one time. At present, the requirements are based on a minimum of either six or thirteen weeks’ business expenditure, depending upon whether client money is held, and an additional component if a business wind-down calculation shows additional resources are needed.
The FSA is proposing to change the rules so that the requirement is based on the value of assets under administration, and the percentage of schemes run by the SIPP operator which hold ‘non-standard’ investments.
The proposals are likely to lead to significant increases in the levels of capital that some operators will need to hold. This will particularly be the case for smaller operators who may hold high percentages of ‘non-standard’ investments.
This was foreshadowed by the thematic review of SIPP providers, where the FSA found evidence of:
• Poor firm compliance with regulatory requirements, particularly in the area of risk planning and mitigation.
• Poor systems and controls.
• A failure to protect clients’ assets, putting clients at risk of loss if a non-compliant SIPP operator were to fail.
• Inadequate controls over the investments held within some SIPPs.
I do believe that this is all part of a bigger picture – the findings of poor firm compliance and risk to consumers emphasising the need for a more solid capital regime.
It seems as though the consultation has polarised the argument into ‘big SIPP operator good’ and ‘small SIPP operator bad’ and the FSA may have factored this in when drafting the rules. Bigger operators should be able to meet the new capital demands, while small operators might not. Similarly, smaller SIPP operators may well have a larger portion of investment in the non-standard assets (offering a bespoke service) while larger operators offer a more streamlined service without the non-standard assets.
The main argument is the basis for calculation – should it be assets under administration (as the consultation suggests) or is there an alternative, such as the number of SIPPs, income or some other basis of calculation.
There are some good arguments here, but I would suggest that a few key points emerge:
• The original SIPP regime stipulated that a provider was needed and that the only entities that could be providers were banks, building societies and unit trust providers. This often meant that a regulated company was standing behind the proposed SIPP administrator/trustee as additional reassurance for consumers. The change to allow anyone to become a SIPP operator perhaps weakened this structure.
• The combination of ’illiquid esoteric investments’ and the need for a regime for SIPPs has, perhaps, led the FSA down the route of considering the timescales that might be needed to run down a failed SIPP operator.
• The current capital adequacy regime is quite low – surveys suggest that 35 operators hold either six weeks or 13 weeks’ expenditure.
The details of the regime will come in the future, but what is sure is that we will have a new capital regime. In my opinion it is not just a case of ‘big is good and small is bad’ , reading across from the thematic review I think that the successful SIPP operators will be those with good management understanding of their business, strong processes and procedures and a viable business plan for the long-term.
Undoubtedly, there will be ripples and there have been a variety of forecasts as to the fall out. Some have suggested that between 20 and 50 operators will not survive. The reality is that we don’t know the extent of the damage that the new regime will bring to SIPP providers, but there will certainly be some casualties.
For me the biggest issue is not the number of SIPP operators, but the quality of those operators left behind, and ensuring that we minimise any risk of consumer detriment.
Mike Morrison is head of platform marketing at AJBell
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