FailedIt’s been nearly two years since the Financial Services Authority (FSA) issued a paper proposing new regulatory capital requirements for SIPP (Self-Invested Personal Pension) providers.

Since then we’ve had a prolonged period of consultation, numerous delays, a change in regulator and much debate over how the proposals will affect both SIPP providers and members.

However, the Financial Conduct Authority (FCA) has now released the final rules and confirmed they will come into effect from 1st September 2016.

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What problems is the FCA trying to address?

In a nutshell the FCA is concerned that if a SIPP provider goes bust there will be insufficient capital to move the member’s SIPPs to an alternative provider in an orderly fashion and that the member could end up meeting the cost.

Under current rules the minimum amount of capital required by a SIPP provider is just £5,000.

As part of their update today, the FCA said: “We have experience of a number of SIPP operators who have sought to close to new business and run off or transfer their book of pension schemes. However, it has been apparent that some operators do not hold sufficient capital to do so in an orderly manner, especially when they administer schemes that allow clients to invest in less easily realisable asset classes that can be difficult to transfer to another provider.” (Source: FCA)

The FCA continued: “When they (SIPP providers) have failed and entered into administration it has proven extremely costly to transfer the SIPP book to another provider, especially when they contain ‘non-standard’ asset classes. There is therefore a significant risk that consumers can end up funding an administration out of their own pension assets.”

The FCA is also concerned that when an investor chooses a particular SIPP provider, they have little or no way of knowing the level of capital resources their chosen SIPP provider has or the likelihood that they will cease to trade.

By forcing SIPP providers to hold more capital, the FCA hopes that SIPP members will be protected should their provider fail.

So what is changing and when?

The new rules will come into force from 1st September 2016 and the FCA expects that the total capital required by SIPP providers to be increased by around £18 million.

In summary the changes are:

  • The minimum amount of capital a SIPP provider must hold will be increased from £5,000 to £20,000
  • Despite industry pressure, the amount of capital SIPP providers need to hold from 1st September 2016, will still be linked to their total Assets Under Management (AUM)
  • The method used to calculate the Initial Capital Requirement (ICR), based on AUM, has been altered to reduce the impact on smaller SIPP providers
  • The amount of capital required will also be linked to the amount of ‘non-standard assets’ they hold; those with greater exposure will have to hold a larger amount of capital
  • Eyebrows were raised at the original list of ‘standard assets’, which failed to include UK commercial property, National Savings & Investments or UK deposit accounts; all very popular investments for SIPP members. The FCA has now changed their mind and added all three to the list of ‘standard investments’. This will come as a relief to many SIPP providers and should help to lessen the likelihood of members having to pay higher fees to cover an increase in capital requirements.

How will this affect SIPP members?

Once introduced it should mean that if your SIPP provider goes bust, they will still have sufficient capital reserves for an orderly handover to another SIPP provider to take place.

However, over the past couple of years or so SIPP providers have highlighted two key concerns, namely, potentially higher fees due to providers being forced to hold more capital and also a reduction in competition, as SIPP providers who can’t adapt to the new regime leave the market.

With the final rules being somewhat watered down, especially in regard to UK property now being classed as a ‘standard asset’, there will be more hope that SIPP providers will not need to increase their fees to cope with the new requirements.

Although the FCA points out that some members may see a fee increase: “We expect that a number of operators will continue to accept non-standard assets into their schemes, albeit at a higher price. While the number of firms offering this service may reduce, as we originally estimated in CP12/33, we expect there to still be a range of investment choices and offerings available to consumers.” (Source: FCA)

When it comes to competition the FCA had this to say: We do not believe that these changes are likely to have a material impact on competition between firms that only administer ‘standard assets’, as capital requirement changes will be much smaller here.” (Source: FCA)

This leaves open to question whether competition amongst SIPP providers offering ‘non-standard’ investments will reduce; pushing up fees for members who wish to make these types of investments.