Are the FCA’s capital proposals ‘adequate’?

This article is part of
Regulatory Changes for Sipps - November 2013

The capital adequacy question has still not been resolved for self-invested personal pension providers.

Almost a year since the regulator published its proposals for a huge shake-up to operators’ cash reserves, the industry still lacks answers as the FCA continues to mull over the feedback to its proposals. Final rules were initially expected in September but were delayed; November is the latest official estimate, although industry sources expect it instead to be towards the end of the year.

Few in the industry disagree with the principle of increased capitalisation for Sipp operators. Under current rules, an individual needs only a few thousand in the bank to be able to set up a Sipp firm. However, some of the finer points of the consultation have led to contention across providers, with many hopeful that the FCA’s continued delay means it is looking a little deeper.

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Starting line

The regulator proposed a big change to how capital adequacy is calculated. Firstly, it proposed raising the absolute minimum capital reserves from £5,000 to £20,000.

In addition, it proposed that an operator’s total requirement should be made up of two elements: an initial capital requirement based on the assets under administration and a surcharge based on the percentage of underlying schemes that contain non-standard asset types.

Andrew Roberts, partner at Barnett Waddingham, says the calculation is reasonable but should not be based on assets under administration.

“There is a really strong argument for taking the approach the FCA has set out but using number of Sipps, not value of Sipps,” he says.

Mr Roberts argues that the value of assets will fluctuate, making it hard to pin down a number. Moreover, he says, an investment with no or little value would require no capital to be held under the current plans, despite still incurring costs if a provider were to wind down.

“Most of the issues going on in the Sipp market are due to investment that have failed for some reason. Those that have failed have low to no value and no contribution to asset values in the asset calculation model.”

Martin Tilley, director of technical services at Dentons, agrees that number of investments rather than value would work better. He explains that one large fixed-term deposit may equal the value of 10 off-plan hotel rooms, but the former carries significantly less risk and is less complex in a wind-down situation.

Beyond the calculation methodology, some of the assets deemed to be non-standard by the FCA in its draft have also caused controversy, particularly commercial property.

Although the asset is likely to be burdensome if a Sipp operator closed down, some argue that as most providers accept commercial property - a fact that in itself challenges its categorisation as ‘non-standard’ - it would not be difficult to enact a transfer if necessary.