It often takes time for the unintended consequences of new rules to be fully understood.
This is certainly true of the latest Policy Statement from the Financial Conduct Authority entitled “A new capital framework for Self-Invested Personal Pension (SIPP) Operators”, also known as PS14/12 for short.
If you work in the SIPP industry you will already be very familiar with this document. If you are a SIPP investor we’d happily place a bet that you probably haven’t heard of PS14/12, definitely not read it and don’t realise how it could affect your SIPP.
But it will affect you, especially if you use fixed term deposit accounts, read on and we’ll explain why.
The aim of the new rules is to ensure that if a provider goes bust, there is enough capital set aside to pay for an orderly movement of SIPPs to a new provider. This is undoubtedly a worthy aim; but we are worried about the unintended consequences, especially for SIPP cash savers, here’s why:
The FCA has produced a list of ‘standard’ and ‘non-standard’ assets, which in part will dictate the level of capital a SIPP provider needs to keep to one side. The greater the number of SIPPs including ’non-standard’ assets, larger the amount of capital needed.
Originally, the FCA didn’t include bank deposit accounts on the ‘standard’ list. However, when PS14/12 was published they had a change of heart and decided a bank account deposit is now a ‘standard’ investment.
This seemingly sensible change, as well as now including UK commercial property on the ‘standard’ list, drew a sigh of relief from the SIPP industry.
But is there a sting in the tail?
The PS14/12 document states: “To clarify, operators should only treat assets as standard assets if they are on the standard asset list. However, where assets are on the standard asset list, but the operator has reason to believe that they would take more than 30 days to realise, those assets should be treated as non-standard.”
In relation to fixed term deposit accounts this raises two key questions.
- How will SIPP providers interpret the new rules? Will they treat a fixed term deposit account, which usually cannot be closed early, as a ‘standard’ or ‘non-standard’ investment?
- If a SIPP provider decides a fixed term deposit account is a ‘non-standard’ asset, what will the consequences be to investors?
Taking each question in turn:
How will SIPP providers interpret the new rules? Will they treat a fixed term deposit account as a ‘standard’ or ‘non-standard’ investment?
This is the $64,000 question.
When assets are transferred between SIPP providers this is nearly always done as an ‘in-specie’ transfer, which means the assets are not sold and rebought simply transferred from one SIPP to another.
The FCA’s use of the word ‘realise’, which has connotations of an investment being sold, seems to be somewhat at odds with reality.
We’ve spoken to a number of SIPP providers, most of whom are still considering their options, whilst seeking clarification from the FCA.
The answer the providers receive could make the difference between whether a fixed term deposit is treated as a ‘standard’ or ‘non-standard’ investment.
If the term ‘realise’ means that the bank or building society issuing the fixed term account must allow it to be closed and the capital returned within 30 days, despite being set up for a fixed term, then clearly the account can be treated as a ‘standard’ investment.
If the account is unbreakable and cannot be closed before the end of the fixed term, then it is more likely to be treated as a ‘non-standard’ investment.
Unless of course the term ‘realised’ is satisfied by an ‘in-specie’ transfer, in which case most fixed term deposits will be treated as ‘standard’.
Martin Tilley, Director of Technical Services at Dentons, echoes these thoughts: “Term deposits come in different forms and it commonly thought that a fixed term deposit is not a standard asset due to its illiquidity. However, the majority of fixed term accounts we have seen are potentially ‘breakable’, all be it probably with a penalty. So it may be possible to realise capital within 30 days. Others we have seen are not ‘breakable’ but are ‘assignable’ and this again should be achievable in 30 days.”
“The SIPP provider is going to need to ask some extra questions when assessing and accepting the account. A term deposit could therefore be a ‘standard’ or ‘non-standard’ asset.”
Andrew Roberts, Partner at Barnett Waddingham agrees: “I think the answer is “it depends”, and that is why term deposits are on the ‘standard’ list but there is a proviso. There are such things as unbreakable term deposits, where you can’t move them. Other term deposits you may be able to assign, transfer in specie to another provider, or cancel before the term is up, which may come with an interest and admin penalty or both.”
If SIPP providers decide a fixed term deposit account is ‘non-standard’, what will the consequences be?
Clearly a SIPP provider could decide that all, or certain fixed term deposit accounts, are ‘non-standard’. That doesn’t mean SIPP investors won’t be able to use fixed term deposit accounts, but the market could change considerably:
- Less choice Some SIPP providers may decide to only accept ‘standard’ assets, others may decide to sell-out or merge, either way we’re likely to see choice restricted in the future
- Goal posts moved There will be some investors who opened their SIPP and had full access to all ‘sippable’ deposit accounts, only to find the goal posts moved by their provider as a result of these changes. We’ve already seen one SIPP provider impose tighter restrictions than the regulator is currently looking for
- Higher fees Some SIPP providers may increase fees to cover the additional cost of holding ‘non-standard’ assets
Our view is that SIPP providers are likely to fall into one of three camps as a result of these changes:
#1: Acceptable account list or refuse certain accounts Some SIPP providers will only accept applications for accounts which they believe to be a ‘standard’ investment, in other words, fixed term accounts where the issuing bank or building society will allow the fixed term to be broken and the capital returned. Our view is that this could be a very short list!
#2: Accept all fixed term deposit but increase fees Some SIPP providers may continue to accept fixed term deposits, irrespective of whether they are deemed ‘standard’ or ‘non-standard’. But fees may rise to cover the additional capital they need to hold in reserve when accounts are deemed ‘non-standard’
#3: Accept all fixed term deposits with no increase to fees Profitable SIPP providers, with larger capital reserves, are more likely to be able to continue to offer full access to fixed term deposits without the need to increase fees
So, to return to the original question; is the door slowly closing on deposit accounts in SIPPs?
If the majority of SIPP providers fall into the first category then the answer could be ‘yes’, which would disadvantage SIPP savers and is far from the intended outcome of the new rules.
However, we hope that sufficient numbers of well capitalised SIPP providers will continue to offer all fixed term deposits; irrespective of whether they are deemed to be ‘standard’ or ‘non-standard’.
What should investors do?
Until we get more clarity over the rules there is probably little which can constructively be done at the moment.
However, if you are considering a new SIPP, we’d suggest selecting a provider who is profitable and well capitalised; it is this group of SIPP providers who are more likely to accept ‘non-standard’ assets without putting up fees.
If you already have a SIPP, and use fixed term deposit accounts, we’d suggest you monitor the situation closely. Look out for your SIPP provider changing their rules on acceptable accounts, putting up fees or otherwise changing your terms and conditions.
We’re here to help
If you have a SIPP and use deposit accounts we’re here to help you.
If you have concerns about the new rules and how they affect you call on of our Independent Financial Advisers on 0115 933 8433, email firstname.lastname@example.org or complete our online enquiry form by clicking here.