Following a couple of false starts we can now expect final FCA guidance on Sipp capital adequacy to be published in August. The exercise was started under consultation paper 12/33, aiming to address the regulator’s concerns that a serious risk of consumer detriment existed within the Sipp market.
The proposed solution was to require Sipp providers to hold significantly more capital for the riskier and more illiquid investments within their business.
That capital is required for one sole reason: to provide sufficient funds and resource for a failed Sipp business to safely transfer investors and their assets to another provider.
Commercial property was originally defined as a non-standard asset. It is both disheartening and contrary to the original intention to protect consumers that the direction of travel is to now consider commercial property as a standard asset.
Has lobbying from parts of the Sipp market been successful in watering down the protection for their own investors?
Property is anything other than standard
It has been argued that commercial property should be treated as a standard asset because it is a speciality of some Sipp providers; that their experience and know-how makes the asset less risky and simple to transfer.
In building up a property portfolio of over 3,300 commercial properties, I’m confident that Suffolk Life has acquired some experience and know-how too along the way. So, why do I still think that commercial property is non-standard?
Commercial property takes time to transact
Most of us will have bought or sold our own properties. The process isn’t as simple as buying or selling an equity. Other parties are involved, from solicitors for conveyancing to valuers and lenders. Even with all parties aligned the process can take weeks.
Would you take the word of a failed Sipp provider?
No Sipp provider will accept a new property without undertaking at least some basic due diligence. Is it genuinely commercial? Are there any environmental considerations? What are the terms of the lease? What are the terms of the borrowing?
Would a Sipp provider accepting a property from a failed Sipp business be willing to accept their information, quite possibly obtained many years ago, on good faith without performing their own checks? Although commercial property was seemingly exempted from the third FCA thematic review, I doubt many Sipp businesses would accept this level of risk.
The expertise and experience just walked out the door
If a Sipp provider ever finds itself in this predicament having failed, what happens to the key staff where all the expertise and knowledge is concentrated? Is there sufficient capital to continue to retain and employ them to see the property transfers through to the end, or will the resources to employ them run out? Or, will they run out first, unwilling to stay with a failed business? How standard does property look then, being transacted by the cheapest staff with limited experience?
The points made above are perhaps intentionally overly dramatic in order to make what is nevertheless a very important point. Cash, equities, collectives and some other investments can be quickly transferred by signing a form or pushing a button. Some other investments can be reassigned and can take a little longer. All this relies on good record-keeping and systems (don’t forget – we’re talking about the scenario of a Sipp provider failing, so the business may not be in the best possible state).
Direct commercial property is completely different. In fact, when it comes to transacting and transferring, it is the most non-standard asset of all.
Greg Kingston is head of marketing and proposition at Suffolk Life