Change is coming
Capital adequacy places an implicit cost on firms – it favours the large but does it do any good?
The overwhelming principle behind it is that it might help sustain an operator after some calamitous event. The right approach is surely to avoid the calamitous event. The FSA has taken some very positive steps in the last year such as its review of small Sipp providers. While advisers are always encouraged to ‘get under the bonnet’, no one is better placed to do this than the FSA.
Its questionnaire last April and telephone follow-up will have greatly deepened its understanding of the individual operators, the nature of their businesses and which areas are of potential concern. That is what really matters rather than ‘politically’ motivated calls – generally from providers, not from the FSA – for larger buffers and fewer players. Consultation paper 12/5 also showed some positive moves from the FSA, such as looking to make standards more consistent across providers and to create greater transparency and disclosure.
One of the hot topics in Sipps right now, if not the hot topic, is capital adequacy. Change is expected and speculation on the level is rife. Some Sipp providers have been championing it although one cannot be sure to what extent they are motivated by belief and to what extent they may be hoping to drive down the price of acquisition targets. No one has sought to voice opposition, no doubt for fear of sending out the wrong implicit messages.
I think it is fair to say that change is needed. The current level is not consistent across all providers, experience suggests it is not enough and it has not been designed with the nature of the industry in mind. However the most important debate is not about the details of the level or operation of capital adequacy. We need to be mindful of what capital adequacy is for, what its limitations are and, above all, what else is required to maintain confidence and stability in the Sipp market.
The purpose of capital adequacy requirements is, in simple terms, to provide a financial buffer. This should help a firm cope with shocks
We need to be mindful of what capital adequacy is for, what its limitations are and, above all, what else is required to maintain confidence and stability in the Sipp market.
Many industry experts have commented, some in private conversation and others in public, that the FSA would like to see the number of Sipp providers reduced. Several have suggested to me that it would like to see the number fall from around 120 to approximately 20. To be sure, an industry as broad, flexible and disparate as Sipps must be difficult to regulate and police, and the large number of small providers involved clearly amplifies the difficulties. So, on that front, the FSA have my sympathy. Equally a certain level of healthy competition can only be good for the consumer.