When the original consultation paper on capital adequacy for Sipp operators was published by the FSA in November 2012, responses were requested by 22 February 2013 with a view to a final policy statement being published in the second half of 2013.
Given the extended timetable in producing the policy statement and that the FCA, which has taken over from the FSA, has a requirement to promote market competition, a fairly radical alteration to the original proposals was anticipated.
While there have been some welcome changes to the original proposals, including the extended time limit for compliance from one to two years, Policy Statement 14/12, published by the FCA on 4 August, does not, in my opinion, provide a sensible framework for the future capital requirements of Sipp operators.
Wind-down
Before discussing the new proposals and changes from the original ones, I find the concept of “an orderly wind-down of a Sipp operator business” difficult to comprehend. The majority of Sipp operators are well-run, profitable businesses providing a reliable service.
As Sipp assets are held in trust, they are secure from creditors. If a Sipp operator wishes to exit the market, it would put its business up for sale. The only other reason for exiting the market is if FCA permissions are removed because of shortcomings in a firm’s management or corporate governance.
It seems unreasonable that the whole market is expected to hold hugely significant amounts of capital to cover a circumstance that is highly unlikely to affect them. It is also true to say that in the event of any wind-down of a business, fees will continue to be generated from the administration of the pension arrangements still under the control of the operator, providing funds to enable the management of the portfolio to continue.
The starting point for the calculation of capital adequacy is the initial capital requirement. This is a multiple of the square root of the assets under administration. From a freedom of information request by the Association of Member-directed Pension Schemes, it was apparent that 55 of the 57 responses to the FSA did not believe that AUA was a sensible approach for determining the amount of capital an operator should hold.
Despite this, the FCA has retained this basis with some benefit to smaller companies, in that the multiple of the square root of AUA has been reduced from 20 to 10 for companies holding less than £100m of AUA, and 15 where AUA is between £100m and £200m.
It remains at 20, where AUA exceeds £200m. The difficulty for smaller firms is if a sudden increase in AUA exceeds one of these benchmark figures. For example, a company with AUA of £190m and no non-standard investments, would have a capital adequacy requirement of around £207,000. If AUA increased to just over £200m through stockmarket fluctuations or new business, the initial capital requirement would increase to £283,000. For a small firm, this is substantial.
Most respondents to the original consultative document suggested that the number of Sipps was a more appropriate measure of determining capital adequacy. Why should it take longer to wind down a firm that holds assets of greater value in the same number of arrangements.
