Several smaller self-invested pension firms have hit out at new capital rules coming in 2016 which they say favour larger firms, will cause fees to rise for clients and reflects a “war” on the sector, in the wake of the news that the sector trade body is launching a judicial review.
In August, the FCA published its long-awaited new rules on the capital Sipps firms will have to hold in reserve from September 2016.
The new regime will comprise of a £20,000 minimum as originally proposed, with an assets under administration calculation determining the exact amount and with more capital required to be held against so-called ‘non-standard’ investments.
Earlier today, FTAdviser revealed the Association of Member-Directed Pension Schemes has begun judicial review proceedings over the FCA’s capital adequacy framework, which legal advice received by the trade body has suggested is “unlawful”.
Legal advice received by Amps was that the FCA’s decision is “unlawful and ought to be quashed”. In a letter to members, seen by FTAdviser, it adds the decision has been taken pursuant to an “unfair procedure and inadequate process of consultation”.
The FCA confirmed it had received Amps’ letter and had responded, but that it could not comment further.
Speaking to FTAdviser, Hyman Wolanski, managing director of Sippchoice, said that the FCA is at war with the Sipp market and using capital requirements as a “weapon”. He said the rules favour larger firms and put smaller firms at risk, and that many firms could be forced to hike fees.
The regulator’s 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 after revisions in the final draft this was reduced to less than 10 per cent.
Mr Wolanski added: “The correct business response is to acknowledge that the FCA have lumbered firms with an additional cost, so you have to raise the capital - which ought not be to difficult for a properly run business - and then cope with the cost of the capital.
“So firms will have to decide whether they can absorb that within their current charging structure or whether they have to add it to their charges.”
John Fox, managing director of Liberty Sipp, shares concerns voiced by Amps over the new ‘assets under administration’ formula, which bases the capital reserve minimum on the value of assets held.
Some have argued instead it would be a fairer reflection of risk to base the formula on the number of assets held.
Mr Fox said: “It’s just things like market volatility... if assets under administration is your benchmark for capital adequacy, unfortunately that’s something the Sipp providers have no control over.
“If you are prone to the volatility of say interest rates, then it’s not an easy way for you to plan as a company or as an industry.”
He also added that many providers have admitted to him that costs will have to go up in order to cover capital.
“The FCA expect the industry to be ready in time, so people are looking at all different avenues to facilitate this. I know some will be looking for fresh money to come in, some have had that recently but others may not be so lucky.
“I reckon we’re in a position today to cope with the rules and will not have to pass any additional cost onto customers, but there is worry in the industry that not everyone is in that position.”
Ian Hammond, managing director at Rowanmoor Group, stated: “The industry isn’t prepared for the new capital adequacy requirements and nor could it be expected to be.
“The mechanics of generating the AUA calculation is the principal challenge. The FCA requires Sipp operators to complete these within 20 days. This will be a relatively straightforward task for the 20 or so platform-based Sipp operators, who receive feeds from investment management companies on a daily basis.
“However, operators with bespoke Sipps, which offer the widest investment choice and constitute the majority of providers in the industry, will have a lot of work to do to gather the required asset valuations.
“Up to this point, there has been no obligation to value assets at such regular intervals.”
