The FCA intervention in the Sipp marketplace over the last 12 months has been well documented, as have forecasts the impact of the thematic review and capital adequacy amendments would lead to mass consolidation within the industry.
In practice, however, this has not been the case. While there have been some notable transactions, consolidation has slowed with forecasts it would pick up again as the deadline for meeting the new capital adequacy benchmarks (September 2016) approached.
Some of the key drivers triggering the consolidation argument have been the additional costs of administering and assessing accurately the Sipp provider asset book and the additional capital needing to be held. The latter for each operator is a function of the value of total assets held and the proportion of Sipps holding a non-standard asset.
While the capital adequacy formula is complicated, Sipp operators have been able to assess fairly accurately the amount of capital they will have to hold. However, one of the contentious issues has been the categorisation of commercial property, which was originally included within the non-standard category but was revised after consultation to be a standard asset “unless there was reason to believe its disposal would take more than 30 days”. This sentence raised the spectre of individual Sipp operators interpreting certain types of property and their ownership in different ways. What might sit one side of the line for one operator might sit on the other side for another. The number of cases considered to be non-standard would, of course, increase the operator’s capital adequacy requirements.
Without complete clarity the decision as to which side of the line the property rested remained firmly with individual Sipp operators. However, the FCA’s June 2015 Quarterly Consultation note has reopened the debate.
This consultation appears to place an enhanced emphasis on whether the property in question is capable of being readily realised. A concern here is that Sipp operators may now view such transfers or disposals as being “in an ideal world” and thus capable of being realised irrespective of their complexity or structure. This may give justification for moving more properties to the standard side of the line, which will have the effect of reducing the Sipp operator’s proportion of cases holding non-standard assets and in turn the amount of capital they will need to hold.
As difficulty in reaching the capital adequacy benchmark would have been a trigger for an exit from the market, this apparent easement might be too great a temptation for some providers. Consultation and comments on this guidance is required by 5 August. Capital adequacy limits are there for the purpose of protecting the consumer and should be uniformly and fairly applied across the marketplace. It is to be hoped all parties involved in setting the conditions arrive at a definition that is unambiguous and simple to understand and work with.
Martin Tilley is director of technical services at Dentons Pension Management