Article for New Model Adviser: The unintended consequences of capital adequacy for SIPP providers
01/11/2013 | Download PDF
Article for New Model Adviser – The Unintended consequences of capital adequacy for SIPP providers.
Adam Wrench, Head of Product and Business Development, London & Colonial
The ultimate objective behind the anticipated changes to Capital Adequacy should of course be applauded and the protection of clients should always be paramount. However, we do believe there may be unintended consequences as a result of these proposed alterations to the rules.
There is a worry that the proposed rule changes could result in the creation of a false market for other pension wrappers such as SSAS or QROPS which have not been subjected to the same stringent levels of FCA regulation. There also appears to have been little joined up thinking with regards to the possible knock-on effect that increased Capital Adequacy on SIPPs could have on transacting business via SSAS or QROPS. Without doubt if we are going to create an altogether fairer, more uniform retirement market this certainly needs to be changed. In addition, from the provider’s side of the fence we are also aware of some SIPP operators who either already have or are considering setting up in another EU state, and who then passport back into the UK in order to circumnavigate Capital Adequacy Rules. This is a similar concept to some advisers who have also done something similar.
The subject of capital adequacy is shaping up to be a bit of a hot potato for the SIPP industry, and the recent announcement by the Financial Conduct Authority to delay its SIPP Capital Adequacy Paper appears to have divided the industry in two.
On the one side are those providers who are growing increasingly frustrated at the ongoing delays, and who are desperate to get the answers that will help them plan for the future. On the other are those who believe that any delay is a sign the regulator is taking providers’ concerns on board, and who are hoping that when the paper is finally published, it will be “fit for purpose.”
After all, surely the correct outcome is far more important than the time taken to achieve it? Especially if it prevents the FCA from having to revisit any new regulation further down the line if it’s subsequently found to be lacking.
The conclusion would seem to be that rather than looking at a provider’s business expenditure, a provider’s level of assets under administration is a better way of determining the potential costs involved in a “wind-down”. As such, they are currently proposing that, in addition to the minimum capital requirements, a provider’s total capital requirement should also consist of a surcharge based upon the percentage of underlying schemes containing any non -standard asset types.
However, the downside of such thinking is that the number of providers offering a place for investors to make nonstandard investments could start to dry up going forwards, as the capital adequacy implications of holding such assets are likely to be severe. SIPPs were always designed for self employed business owners who didn’t otherwise have access to an occupational pension scheme, and so SME business owners who could benefit from putting their business premises into their pension is traditional bread and butter SIPP business.
It therefore came as a surprise to me that UK commercial property made the FCA’s ‘non-standard’ list, with the result of this decision being that the traditional market for SIPPs seems to have been lost.
The FCA has been very open with regards to their expectation that some SIPP providers will go out of business over the next year or so as a result of these changes, which does make me question as to whether this has been their real intention all along. Certainly, creating a tighter, more consolidated market would make it easier for the FCA to monitor, but reducing the number of players will ultimately lead to less competition within the marketplace. However, at the same time increased competition amongst current SIPP providers, for regulated and “bread and butter” SIPP business, would ultimately benefit the consumer.
We don’t yet know final deadlines but whatever rules the FCA does introduce, there needs to be enough time for providers to comply. One thing we do know for certain is that the new capital adequacy rules will undoubtedly have a significant impact on all SIPP providers by diverting much needed capital to be ‘ring-fenced’ therefore leaving it unavailable to grow their business, and is most certainly likely to lead to a segmentation within the SIPP market itself, between providers that are prepared to facilitate “non standard investments” and those that are not. In addition, it could also lead to the sorts of unintended consequences mentioned above of simply seeing SIPP funds diverted to their non-FCA regulated cousins in the form of SSAS or QROPS.
Wouldn’t a better approach be to have some form of joined up thinking with regards to capital adequacy requirements that span SIPPs, SSAS and QROPS, and perhaps introduce this hand-in-hand with the creation of a “permitted investment list”?
Notes to Editors
About London & Colonial
London & Colonial specialises in self-invested products for both UK residents and persons resident overseas.
The London & Colonial Group includes
(1) London & Colonial Holdings Limited – UK parent company
(2) London & Colonial Services Limited which is regulated by the UK Financial Services Authority and operates SIPPs and SSASs
(3) London & Colonial Assurance PLC which is regulated by the Gibraltar Financial Services Commission (matching UK standards) and which offers Open Annuities, QROP Annuities and Open Offshore Bonds
(4) L&C (Administration Services 2) Limited and London & Colonial (Trustee Services) Limited which are both based in Gibraltar and offer the EU SIPP.