Sipp operators plan to challenge the FSA’s decision to exclude commercial property from the list of standard investments it will use to calculate capital adequacy requirements.
Last week, the regulator 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 surcharge for non-standard assets will reflect the additional costs of transferring these assets. The FSA says this is necessary because it takes longer to transfer a scheme containing non-standard asset types.
Non-standard assets will be defined by reference to a list of standard assets (see table). Commercial property does not feature on the FSA’s list.
Dentons director of technical services Martin Tilley says: “We were very surprised to see commercial property is not on the list of standard investments and that is something we will look to challenge.
“We have a fair proportion of commercial property on our book which we have carried out thorough due diligence on. If the FSA does not change its stance this will have a larger impact on us than we previously expected.”
A J Bell head of marketing Billy Mackay says: “The FSA is concerned about the time it will take to realise or sell underlying Sipp investments, and commercial property could potentially take a while to deal with.
“But it is a long established asset class with no history of problems. We think commercial property should not be treated as an abnormal asset class and we will be making this point to the regulator.”
MoretoSipps principal John Moret says around £10bn of commercial property is currently held in Sipps.
He says: “Sipps with exposure to commercial property are going to be hit by this because that is outside the FSA’s definition of a standard asset.
“That is extraordinary given that about £10bn of Sipp assets are held in commercial property. I think the industry will push back on that.”
FSA head of investment policy David Geale says: “The length and expense of the due diligence likely to be required to support a commercial property asset being realised or transferred in a wind-down situation leads us to believe that it should not be a standard asset.
“However, this is a consultation and we are keen to hear other opinions.”
The regulator has also proposed linking capital requirements to each Sipp firm’s assets under administration, meaning those administering the most assets will need to hold the highest amount of capital.
The FSA says the relationship between AUA and capital requirements should be “non-linear” because firms responsible for large volumes of assets benefit from economies of scale and the ability to undertake bulk transfers of similar schemes.
Geale says: “These proposals reflect the volume, range and complexity of assets now being put into Sipps and, ultimately, will protect investors better in the unfortunate event an operator is wound down.
“Put simply, the more assets you have under administration, the more capital you will need and if some of those assets happen to be more risky you will need even more.”