Regulation, regulation, regulation

This article is part of
Self-invested Personal Pensions - April 2014

Following a relatively serene existence for their first 18 years, Sipps have been hit hard following regulation in April 2007. The impact appeared to be negligible at first, and as recently as 2012 the FSA described Sipp regulation as “a work in progress”. Today, a full seven years on from the first days of Sipp regulation, there seems little doubt that 2014 will go on record as the most significant year of regulatory change to date.

The perfect storm

It would be difficult to conceive a more challenging environment for Sipp operators. Alongside the increase in regulatory scrutiny has come an unprecedented volume of legislative change, all of which will be extremely familiar to advisers. Repeated changes to lifetime and annual allowances, unsecured income to drawdown, drawdown limits, reversing changes to drawdown limits and mandatory illustrations to name but a few, have piled on the pressure. A decade ago most Sipp operators would put few, if any, resources towards change but now it is probably one of the most important functions in any Sipp business.

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If this wasn’t enough, the ruling on capital adequacy is just a few months away. In simple terms, if the rules are implemented as originally written, most if not all Sipp providers will need to reserve far greater capital than today. For some it will mean reserving millions, rather than thousands, of pounds and there will only be 12 months for them to secure the required funding.

Capital, capital, capital

It is worth remembering why the FCA is so keen to see Sipp businesses recapitalise, as well as how it intends the precise amounts to be calculated. Capital reserves are required in order to provide sufficient funding to wind down the business in the event of failure and, because of the complexity and diversity of assets held by many Sipp providers, the FCA believes more is required.

The FCA’s proposals link the required amount of capital to the complexity of the assets with more capital needed to cover ‘non-standard’ assets. Further definition is still needed but non-standard assets are those that are likely to pose greater risk to the provider and which are generally illiquid or not readily transferable.

The implication is that businesses with higher proportions of non-standard assets are riskier and would be more difficult and time-consuming to wind down and transfer assets elsewhere. Comprehensive market surveys, starting with Money Management’s own review in 2013, now ask providers to reveal the proportion of non-standard assets held. This helps advisers form a view on their chosen Sipp provider, and they are likely to want to ask more detailed questions of those who have more non-standard assets than others.

The need to raise significantly more capital is driving consolidation in the Sipp market, although activity has stalled as the regulator delayed its capital adequacy ruling. This is now due in the middle of 2014 and is expected to trigger another wave of acquisitions as some businesses decide to cease Sipp administration.

We have been here before. Ahead of regulation in 2006 it was widely predicted that a number of Sipp operators would exit the market as they would be unable to cope with both regulation and the new capital regime proposed at the time. Those predictions proved to be false, the Sipp market demonstrating early on its flexibility and resilience. This year may deliver a different outcome though, as there is a feeling that a greater number of Sipp providers haven’t grown much since the introduction of regulation, have poorly diversified businesses, weaker balance sheets and higher concentrations of non-standard assets, including Ucis.