How should FCA capital adequacy rules work?

The Financial Conduct Authority’s looming introduction of tougher capital adequacy rules for self-invested pensions need to state that capital reserves should be based on the number of plans and not the value of assets, according to many in the sector.

Recently, FTAdviser revealed the Lifetime Sipp Company sent investors in troubled property group Harlequin a letter telling them that the FCA had “advised” them to value these investments at £1 until independent valuations have been conducted.

The FCA denied it gave such a specific recommendation, claiming instead that it told the Sipp provider they should “take a prudent approach to valuations”. The regulator told FTAdviser “how each firm values the investment is up to them”.

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This opened a can of worms in the sector. 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.

Mr Tilley argued that despite the high potential costs and administration burden if the worst were to happen, a Sipp firm would be required to hold negligible capital in reserve at this valuation compared to that held by other Sipps holding more ‘mainstream’ commercial property investments.

Greg Kingston, marketing director at Suffolk Life, echoed this sentiment and said it highlighted that the FCA needed to force firms to hold capital based on the number and complexity of assets, irrespective of their value.

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. Final rules from the FCA are expected next month.

Mr Kingston said the FCA’s current proposals risk “missing the point”. He said the value of an asset is of “prime importance” to an adviser and their client as it is a figure that is contributing towards retirement, while for the Sipp provider it is often volume that is the key.

“Value should have far less importance to a Sipp operator, unless they’re also taking revenue from it, of course.

“It should not be forgotten that the FCA consulted on this issue and will likely dictate terms later this year, as there is no consensus within the market and because the FCA sees some Sipp operators likely to fail and cause significant detriment to consumers.

“Capital is needed to fund the safe, orderly transfer of clients to another firm should the Sipp operator fail. The amount needed should not depend on the value of client assets but rather the number of plans and the complexity of assets within them.

“It is simpler to deal with the transfer of 100 lines of stock as opposed to 1,000, even if the 100 are worth more.”

Mr Kingston added that the pending proposals from the FCA should go “a long way” towards restoring parts of the Sipp market to health.