The FCA recently announced further delays to SIPP reforms. Fiona Murphy takes a look at what this means for SIPP operators and advisers.
The Financial Conduct Authority recently said it is 'mindful' of industry feedback on the treatment of commercial property as a non-standard asset for self-invested personal pensions (SIPP) capital adequacy.
Speaking at the Association of Member-Directed Pension Schemes (AMPS)'s annual conference Financial Conduct Authority director of long-term savings and pensions Nick Poyntz-Wright confirmed the regulator was taking into account industry views. These views had argued against the recommendation that commercial property should be treated as a non-standard asset.
He said: "We are taking into account the feedback we received. There was a particular focus in the feedback regarding commercial property. I am not able to tell you about a final decision on that but we are mindful of the feedback we have had."
At the moment 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.
In CP12/33, previous regulator the Financial Services Authority, proposed raising the minimum capital level for providers from £5,000 to £20,000 and apply a capital surcharge for non-standard assets - including commercial property.
Last year industry experts joined the fray by giving their views on how they think the reforms should work with the Association of Member-Directed Pension Schemes submitting a detailed set of recommendations to the FCA.
It recommended two alternative formulas for capital requirements, a revised capital surcharge based on the number of illiquid SIPPs and a minimum fixed capital requirement of £50,000, with an additional capital requirement of 20% for firms who do not meet an objective systems and controls test.
The industry has already waited some time for feedback and it is now clear the wait is far from over. It was also confirmed at the AMPs conference that both strands of reform are to be delayed from their expected June 2014 release to Q3 2014.
Poyntz-Wright says both updates would be published as a "package" and he was "confident" both updates would be published within Q3.
The thematic review would publish examples to highlight good practice alongside findings of bad practice in terms of how SIPP operators conduct due diligence.
He also revealed the regulator was consulting on a transitional period, possibly in excess of 12-18 months for the SIPP industry to adapt to the changes enforced.
Poyntz-Wright said the regulator's stance was not to "squash the SIPP market into shape" but to focus on good outcomes for customers and the impact of accepting non-standard investments on SIPP businesses.
He also responded to criticism from AMPS committee member Geoff Buck who said the relationship between the trade body and the FCA had been "difficult" as they often received information about the industry "on the grapevine" rather than from the regulator itself.
Poyntz-Wright confirmed: "We are determined to improve engagement - it is important that we share and have that dialogue with the industry."
So what do key industry figures think of the delay to the reforms and what shape are they likely to take?
Rowanmoor Group head of pensions technical services Robert Graves says: "We knew the policy statement for capital adequacy wasn't to be confirmed for quite some time so at least we have a date set for Q3, albeit it is still only an expected date.
"Overall, I would say we're in a better position than we were, but there is a big difference between June and the end of September, given the hiatus the industry has been in from when we thought there was going to be a policy statement. And there is still that unknown over what the policy statement will say."
AMPS chairman Neil MacGillivray says: "We're disappointed there's a further delay but if it reaches the right result, it's worth waiting for. One of our core issues was the categorisation of commercial property as a non-mainstream investment. Although there is a cost of transferring, if a pension provider failed and they wanted to transfer the business, it should be relatively straightforward.
"I understand some providers may take a closer look at properties before they would take them but I wouldn't put them with the non-mainstream investments there have been problems with. From what was said, it also seems that increased due diligence also might have a bigger impact on capital adequacy."
He continues: "We fully supported that an increase in capital adequacy was not unreasonable and the initial levels we stated were actually higher than what was recommended in the consultation. Our issue was on the basis of how it was calculated, we felt that was unfair. Also, we had issues over categorisation - assets such as commercial property treated as higher risk and traditionally they have been the backbone of SIPPs."
It's clear that the upcoming reforms still hold a lot of unanswered questions for the industry.
MacGillivray says: "With member-directed pensions, the member decided what investments they should go into. It was not unusual for esoteric investments to be held but now with the way high-risk investments are promoted and marketed, it has tightened up considerably since the scale of things that have happened. It will be harder for investments like that to be taken.
"There's also the argument, which came out in the debate at the AMPS conference on permitted investment lists. Would these investments be allowable, and in many cases, they would be. That wouldn't have given the protection some people would have needed. Do SIPPs come down to a level where high risk investments are collective shares and commercial property?
"For certain people, who have successful businesses, entrepreneurs, those looking for a better return than you see from standard investments and are prepared to take that risk, are you going to close the door to them? In a time where the government is looking at ways of raising finances for businesses and infrastructure, are they restricting the innovation required which comes with some investments?"
Meanwhile Graves questions how commercial property, which is difficult to define, can be classed into a neat category.
He says: "If you were dealing with a traditional UK warehouse, one wouldn't expect to find too much problem in trying to transfer that in specie to another SIPP or a SSAS. But if you're talking about an overseas property, there may be complications. It's difficult to have a sweeping classification that all commercial property should be treated as standard or non-standard.
"My feeling is property should be standard. If we are talking about traditional commercial property, much of that can be transferred, if they're talking about transferring in three months. It might take a bit longer if there's something more complex about it. Or there could be another classification, standard, non-standard and commercial property."
One idea could be the introduction of tiered levels of capital adequacy, according to Dentons Pension Management director of technical services Martin Tilley.
He says: "I felt if you had a UK based bricks and mortar commercial property, putting it in the same category as an off plan hotel room in the Caribbean was wrong. There should be a couple of tiers for this. Certain assets should be less ‘non-standard' than others.
"I've always been very pleased that the regulator has taken on these points mentioned in the early stages of the consultation and I'm hopeful it will lead to tiered levels of non-standard assets, which might also lead into tiered levels of capital adequacy."
MacGillivray also warns around the extent of SIPP providers being expected to carry out due-diligence and how any changes will affect industry appetites.
He says: "What is guidance - what is reasonable due diligence to do on an investment? The SIPP provider is not an adviser, they're not qualified to give the advice, what is a reasonable step of due-diligence? You know the steps you need to take in terms of your duties to the Inland Revenue and what other steps should you take.
"Many firms will decide we will not take any non-mainstream investments, saying they are too much of a risk to their business models and the question is, is that right? I don't know but it would resolve issues if many were no longer-allowable although the FCA is saying it doesn't want to be prescriptive, there is no standard level of due diligence and sometimes you need to tell people, this is what we expect people to do. "
There are no clear answers as yet but the real positive seems to be increased engagement from the regulator.
Tilley concludes: "The regulator has had a long period of time and it's done a lot of research. I'm hopeful what will come from the regulator will be fit for purpose so we don't have to revisit it a year down the line."
The industry will be waiting for what Q3 holds with bated breath.
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