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Martin Tilley: Judging the quality of Sipp assets

Sipp providers are coming under pressure from a change in emphasis at the regulator, ombudsman and HMRC

This month marks the first anniversary of the new capital adequacy regime for Sipp operators brought in by the FCA. The change in benchmark was designed to improve the protection of consumers by ensuring Sipp operators hold sufficient capital reserves to allow an orderly wind up of the business should it become necessary.

The initial introduction sparked controversy about the treatment of certain assets, in particular that the number of non-standard assets (those that cannot be disposed of for fair value within 30 days) held increased the levels of capital a Sipp operator must hold.

Conformity and consistency among operators was eventually found and those reaching the new benchmarks were perceived as suitably strong to continue.

However, the FCA subsequently announced four firms had failed to meet the new benchmarks and over a dozen more have reported incorrectly on their quarterly returns since. No further news on the details of this incorrect reporting have been released. Whether it was simply bad box filling or something more serious remains to be seen.

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Either way, absolutely paramount for advisers is the financial stability of their current and prospective Sipp partners.

This has been reflected in the due diligence questionnaires we have been completing for intermediaries of late. Full of questions about capital reserves, it is clear advisers have got the message.

Another frequent question is about the proportion of Sipps holding non-standard assets. However, the answer to this question and interpretation can be misleading and advisers will sometimes need to dig more deeply.

While a high proportion of Sipps holding non-standard assets will contribute to a provider’s higher capital adequacy levels, it should not necessarily be cause for concern.

One medium-sized player with 5,000 Sipps, of which 10 per cent hold non-standard assets, will have 500 non-standard Sipp schemes, while a larger Sipp provider with a platform offering could have 30,000 Sipps but only 2 per cent holding non-standard assets: a total number, though, of 600 non-standard Sipps.

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What the headline figures do not tell you are how many of those non-standard Sipps hold more than one non-standard asset, which could distort the outcome.

That said, a far more worrying concern has arisen. It is not necessarily the quantity but the quality of those non-standard assets that will count.

What has become apparent this year is that there has been a change in emphasis, in particular at the Financial Ombudsman Service.

There have been headline cases where clients and investments have been accepted by Sipp providers from certain non-regulated intermediaries after specific warnings from the regulator had been given. This could result in the Sipp operator being liable should losses occur as a result of investments promoted by those intermediaries.

This could be a game-changer for some Sipp operators, whose exposure and concentration in such areas could become a significant financial liability. Should any compensation payments arise, they cannot be covered by the funds held to meet capital adequacy. It will be the Sipp providers’ own cash flow that will bear the brunt or, at best, their professional insurance cover which will be subject to an excess in any event.

And it is not just the FOS applying pressure to Sipp providers’ financial wellbeing. HM Revenue & Customs has this year raised a tax assessment by way of sanction charges on another Sipp provider in relation to assets accepted onto its book between 2011 and 2013. While these charges are currently under appeal, fighting such challenges can be a costly exercise. This provider was not the sole accepter of the asset in question, so others will watch this case with interest.

Lastly, the FCA has recently launched an inquiry into investments in hotel developments in Cape Verde. These investments, which were unregulated and largely promoted by unregulated intermediaries, were often accommodated within Sipps.

The purpose of the FCA investigation is currently unknown. While responsible for overseeing activities of regulated firms, it has the jurisdiction to intervene if it suspects an unregulated company has stepped into activities it must be regulated to carry out. It will most certainly look at any regulated entity that has facilitated the investment being made.

So the number of Sipps holding non-standard assets or the number of non-standard assets held on their own is not a clear factor in relation to a Sipp provider’s financial strength and capital adequacy.

More indicative is the processes in operation concerning the acceptance of non-standard assets and the potential for those assets to become a toxic liability in terms of administrative costs or financial penalty by way of compensation or tax changes.

Martin Tilley is director of technical services at Dentons Pension Management

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