One of the most heated discussion points in recent history in the Sipp market has been that of capital adequacy. First announced by then regulator the FSA in its CP12/33 paper in November 2012, it was proposed that Sipp operators would be required to increase the amount of capital their business must hold in reserve. The changes proposed a formula that results in significant increases in capital requirements for Sipp operators whose assets contained the greatest proportions of non-standard assets.
The regulator defines non-standard assets as those which, in general, cannot be realised or transacted in less than 30 days. Included in this classification are unregulated investments about which the regulator has repeatedly raised concerns. The classifications are also behind the sharp increase in complaints the Sipp market has had, and have contributed significantly to a costly increase in the levy imposed on advisers and other parts of the Sipp market by the Financial Services Compensation Scheme (FSCS).
The reaction to the FSA’s initial proposals was met by large parts of the Sipp market with shock, disbelief and disagreement. Following the publication of the FCA’s amended proposals in PS14/12 (published in August 2014), this reaction threatened to turn hostile.
The board of the Association of Member-directed Pension Schemes (Amps) took the unprecedented step of starting proceedings for a judicial review on the basis that the FCA’s consultation process was “unlawful”, “unfair” and “inadequate”. This action – that took many Amps member firms by surprise – was ultimately refused by the courts in early 2015. The approach reflected the mood of a significant number of Sipp operators, and the manner in which it was conducted, highlighted the lack of agreement among them.
More recently, in June this year, the FCA provided further clarification – and what appeared to be a limited last opportunity – to provide feedback when it published CP15/19. With less than a year to go before the final capital rules are implemented in September 2016, the regulator has yet to publish a final position but the expectation is that there will be few changes from its current standing.
Throughout what has clearly been a difficult journey the response to the discussion from advisers has been ambivalent, despite embarking on changes to their own capital requirements. Now that the new rules appear to be set, advisers need to change their approach in the crucial period between now and implementation on 1 September 2016. So, what do you need to be aware of?
Why is this important?
With less than a year to go until the rules come into play, advisers now need to understand what Sipp providers need to be preparing for in the run up to September 2016. The failure of a Sipp operator is, fortunately, a rare occurrence. Nevertheless, this is not to say it has not happened, and could not happen in the future. A number of potential failures of Sipp operators have been averted in recent years, due to either a distressed acquisition or a more orderly and mutually agreed exercise in consolidation.
The Sipp market is likely to see further acquisitions of varying size over the next 12 months. However, an uncertain future waits for those firms who will be unable to meet the regulator’s requirements next year and who are unable to find a party willing to buy them who can.
