The Financial Conduct authority published a policy statement on its new capital framework for self-invested pension operators today (4 August), finally giving the industry some answers to close to two years after proposals were first published.
In November 2012 the Financial Services Authority consulted on a new regulatory capital framework for Sipp providers, which has now been amended in response to comments from the industry.
The FCA identified a “real risk” that when an operator exits the market it cannot afford to continue to administer its pension schemes, find another administrator for the pension book, or fund the closure, even when fee income is still coming in.
“This is particularly so where the firm administers non-standard assets, which add significant complexity from the perspective of a firm who considers acquiring the pension book,” read the statement.
With that in mind, here are the five key points garnered from the statement:
No better calculation proposed
The FCA considered many possible ways to calculate the capital requirement for Sipp operators, but in the end did not feel that a more credible option emerged from the feedback than its originally proposed multiple of assets plus non-standard surcharge approach.
“Overall, the industry challenged why we are making these changes, and requested further assessment of the market failure. However, through our supervisory work, it is clear that many operators do not hold sufficient capital to exit the market, if necessary, in an orderly manner, and this can cause significant harm to consumers.”
Some respondents suggested a more ‘risk-sensitive approach’, however others argued that the existing approach was overly complex. Some, such as Suffolk Life, are still bemoaning that assets under management does not cover risks associated with small pots biased to illiquid investments.
Small firm repreive
Although the FCA did not ask a specific question on the initial capital requirement, it received feedback that persuaded it to make changes that benefit small firms some felt were disproportionately impacted by the costs of capital requirements.
It said it was amending a discrepancy that would have meant a firm with £100m in assets would need to hold 0.2 per cent, while the requirement for a firm with £500m would be 0.09 per cent.
The FCA accordingly softened this discrepancy to smooth the relative impact on smaller firms, amending the constant used from £20,000 to £10,000 for those with assets under £100m, and £15,000 for those with assets of £100-£200m.
In truth, this is designed to prevent a whole host of smaller firms going bust, after the FCA discovered last year it was unlikely that there will be a queue of willing buyers and clients could be left abandoned.
Commercial property reinstated
Consultation feedback and thematic works with the industry has led the FCA to agree that UK commercial property can be transferred between pension providers at relative ease, provided there is a purchasing party prepared to accept the asset.
Having said that, the paper admits there will be instances where this is not the case. “For example, where the transfer of UK commercial property cannot be registered at the Land Registry, or it would take more than 30 days to transfer the asset. Where a firm identifies such an asset in its schemes it should treat the asset as non-standard.”
This move was seen as inevitable by some. Commercial property is the zeitgeist in investment and is certainly common, for it to be classified for the purposes of Sipps capital adequacy as ‘non-standard’ and this to potential restrict access, would have been extraordinary.
Two years to comply
Suggestions that the transitional period should only be one year were rejected for fear of increasing the risk of disorderly exits from the market.
“However, we are concerned that the current capital framework is not sustainable and leaves consumers exposed to considerable risk,” the statement read.
“Accordingly, we will apply a two-year transitional period, and these rules come in to force from 1 September 2016.”
Overall: Fewer casualties
The initial cost benefit analysis estimated that 14-18 per cent of Sipp operators may choose to exit the market as a result of the capital adequacy policy, but the above changes will reduce this to less than 10 per cent, according to the regulator.
Although around half of all providers do not hold any non-standard assets or are no longer accepting non-standard assets, the FCA stated that those which do administer non-standard assets may need to embed additional systems.
“For the majority of affected firms, we would expect set up costs between £2,000-£20,000, and then ongoing costs of £1,000-£8,000 per annum.
The FCA agreed that this policy may increase fees for consumers as costs are passed on, but it suggested that were operators to currently charge an average annual fee of 0.5 per cent of assets under administration to administer a pension scheme, costs would only rise by 0.05 per cent.
