The FCA looks set to reverse a proposal to force Sipp operators with commercial property investments to hold extra capital following criticism from the industry.
In November 2012, the regulator set out how it planned to raise capital requirements for Sipp firms. It proposed increasing the minimum amount of capital a Sipp operator must hold from £5,000 to £20,000, with a surcharge for providers holding non-standard asset types.
The regulator’s original list of standard assets did not include commercial property, a decision that has since been challenged by the industry.
Speaking at the Association of Member-directed Pension Schemes annual conference in London last week, FCA director of long-term savings and pensions Nick Poyntz-Wright said the FCA is “mindful” of the concerns raised by the industry over the regulator’s commercial property stance. He said: “We are taking into account the feedback we received [to the consultation]. 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.”
Poyntz-Wright also indicated providers could be given longer than 18 months to transition to the new cap-ad regime.
He said: “It would be perfectly normal for there to be a transitional period to allow firms to move on to a new level of capital.
“Often that transitional period could be 12 or 18 months, but it could also be longer.
“We are thinking about what the appropriate period will be and that will be confirmed when we publish our finalised position.”
Poyntz-Wright insisted the regulator is not trying to “squash” the Sipp market and argued reforms announced during the March Budget will be a boon for the sector.
However, he warned firms about the risks of allowing large volumes of illiquid, unquoted investments on their books. The FCA will publish the outcome of a thematic review into the Sipp market later this year.
He said: “Our concern is illiquid, unquoted, non-standard, unquoted investments are still getting through the net to a rather higher degree than would be expected.
“If some of these investments are taken on and run into difficulty, that creates a number of difficulties and consequences for both the consumer and for the Sipp firm involved.”
The FCA’s final proposals for Sipp cap-ad reform are due to be published in Q3.
Would you really want to invest in a Sipp that couldn’t raise £20,000? Especially with the additional risks of commercial property.
There is a complex calculation providers need to carry out to work out their cap ad and for those that allowed non- standard investments it seems to be quite expensive, from memory.
Recap: How the FCA has proposed reforming Sipp capital adequacy requirements
Currently, Sipp operators are required to hold capital reserves equal to six weeks of annual audited expenditure or £5,000, whichever figure is higher. Firms that hold client money must hold 13 weeks of expenditure in reserve.
In November 2012, the regulator proposed raising the minimum capital requirement to £20,000.
Capital requirements will also be linked to a Sipp firm’s assets under administration and the amount of non-standard assets the company holds.
The regulator believes the relationship between AUA and capital requirements should be “non-linear” because firms responsible for more assets benefit from economies of scale and the ability to undertake bulk transfers of similar schemes.
The surcharge for non-standard assets will reflect the additional costs of transferring these assets. Non-standard assets will be defined by reference to a list of standard assets.