Self-invested personal providers substantially writing down the book value of Harlequin investments to as low as a nominal £1 are making a “mockery” of new capital adequacy rules being proposed for the sector, according to Dentons.
FTAdviser revealed on Friday (26 July) that The Lifetime Sipp Company has written to Harlequin investors stating that they are valuing the investments at a nominal £1, following a Financial Conduct Authority audit.
The firm said the FCA had told it to write to all Harlequin investors and “advised” it to revalue the investments at £1. It added that it expected other firms to follow suit in the coming months.
The FCA denied it had suggested a £1 valuation, stating simply that firms should “take a prudent approach to valuations” and that “how each firm values the investment is up to them”.
A spokesperson for Harlequin questioned the valuations, suggesting that the writedown is based on the fact that its UK sales arm has entered administration and does not reflect the financial position of the overseas construction arms that are building the investment properties.
He said: “The overseas companies have not entered into any insolvency procedure. Therefore any valuation based upon Harlequin Property’s administration process is both arbitrary and highly questionable.”
Martin Tilley, director of technical services at Sipp provider Dentons, told FTAdviser that revaluing non-mainstream investments such as Harlequin to such a low value effectively allows firms to bypass new FCA capital adequacy rules.
Under plans opened for consultation in November, the regulator would increase the minimum amount of capital a Sipp firm has to hold to £20,000. The exact figure would be based on assets held by the firm, with ‘non-standard assets’ carrying a surcharge.
Mr Tilley said that while he understood the FCA’s reason for encouraging a re-assessment of Harlequin investments in light of full professional valuations not being carried out yet, any move to slash the value would have “wide ranging implications”.
Using the example of a £50,000 investment, Mr Tilly said revaluing this at £1 will require effectively no capital to be held in reserve, in spite of the fact that administering any wind up and transfer of the investments in the event of “the problems raised about Harlequin being realised” would likely be very high.
He said that a Sipp holding ten £50,000 investments in Harlequin would therefore be required to hold negligible capital reserves against a £10 book value, while a Sipp with a “well due diligenced” UK bricks and mortar commercial property valued at £500,000 would need to hold significantly more.
He added that should a professional valuation for Harlequin investments be forthcoming after the new capital rules have come into place, it could result in firms that have revalued the assets seeing their reserve requirement soar effectively overnight.
Mr Tilley said the industry is expecting the FCA to issue its final instructions on Sipp provider capital adequacy within the next two months and it is anticipated that Sipp providers will have only 12 months to raise their capital reserves.
Mr Tilley said: “By valuing a notional £50,000 investment at £1, the capital reserve required for a Sipp provider holding a Harlequin property investment would be negligible, whereas, if the problems raised about Harlequin are realised, the cost of actually having to administer the wind up and transfer of these investments could be high.
“This would not seem to serve the consumers interest and in fact appears to have the opposite effect to what the capital adequacy consultation was set out to achieve: ensuring Sipp providers have adequate capital adequacy to cover an orderly wind up and transfer away of their Sipp book.
“I doubt very much if professional valuations of Harlequin investments are going to be made available within the next 14 months so this may very well be an issue.
“When they are though, firms holding large quantities of such assets will suddenly have a massively increased cap ad requirement the moment the valuation is produced.”
