People sitting in cafeteria.

It doesn't rain it pours… New capital adequacy rules for SIPP firms introduced from 1 September

06 September 2016. Published by Rachael Healey, Partner

SIPPs are never far from the headlines at the moment. The most recent issue for SIPP firms to deal with are the new capital adequacy requirements. The effect of the new rules is to place an increased capital burden on SIPP firms holding so-called "non-standard assets".

The reasoning behind the capital adequacy rule changes is that in the FCA's experience some SIPP providers leaving the market have left a bill for members transferring their SIPP book to a new provider.  The intention of the new rules is to cover the costs of winding down an operator in the event of financial difficulty.

The new capital adequacy rules introduce a change to the FCA formula for calculating the minimum capital requirements for SIPP providers.  The new formula is based on the value of assets the SIPP provider has under administration and the number of SIPPs that are invested in any part in assets the FCA classifies as "non-standard".  The old capital adequacy rule calculated the minimum capital needed based on the equivalent of a SIPP operator's expenses for 13 weeks.  The new rule requires an increased amount of capital.

The definition of "non-standard" assets hit the headlines last year when the FCA initially included commercial property in the definition (albeit this was later changed).  "Standard" assets include physical gold bullion, national savings and investment products, bank account deposits, DFM portfolios provided the underlying assets are also "standard assets" and units in regulated collective investment schemes.  "Non-standard assets" can include any standard asset if it cannot be valued or sold/realised in 30 days. Typical non-standard assets include unlisted company shares and unregulated collective investment schemes.

The new formula was announced by the then FSA in November 2012 and so SIPP providers have had time to make appropriate arrangements to ensure that they have adequate capital in place.  The FSA said at the time of the announcement that it expected 20% of SIPP providers would be unable to meet the new requirements and the result has been a consolidation in the market.  Some firms have already increased charges in order to cover the new capital adequacy requirements.

The change will impact SIPP providers holding "non-standard assets" and it is going to be difficult for SIPP providers to mitigate this position in circumstances where some "non-standard" assets include closed funds and so there is no option for members to encash the investment, mitigate the increased capital adequacy requirements (and potentially a charge) and purchase a standard asset.

The change is not only important for the SIPP market but also for advisers who, as part of their due diligence, should be looking at whether or not a SIPP provider meets the capital adequacy rules before making a recommendation to transfer funds to a specific SIPP. 

No doubt the change will also be seen by many as the FCA's way of discouraging SIPP providers from permitting members to invest in "non-standard" assets; or perhaps what the FCA considers to be "undesirable" assets.