SIPP Operators will be forced to hold an extra £18m in reserve capital under new rules outlined by the FCA last month. The proposals follow the FSA's (as it was then) consultation back in November 2012 on a new regulatory capital framework intended to ensure that if a SIPP Operator went bust there was sufficient capital to move the members' SIPPs to an alternative Operator in an orderly manner. The original consultation suggested the reforms could cost the industry (which administers around £100bn of pension assets through SIPPs) £54m.
Whilst some firms will need to raise additional capital to that currently required (£5,000) to ensure compliance with the rules, the capital adequacy proposals are significantly watered down compared to those put forward in the original consultation. It is hoped that this will maintain competition between operators by allowing SIPP Operators who would have otherwise been unable to comply with the initial proposals to continue to offer a range of investment choices to the market.
In summary, the changes now mean that:
- The minimum amount of capital a SIPP Operator must hold will be increased from £5,000 to £20,000.
- The amount of capital a SIPP Operator will need to hold will still be linked to their total AUM (not the number of SIPPs administered by a firm, as had been hoped for by some) – but will also be linked to the amount of 'non-standard assets' they hold.
- The method used to calculate firms’ capital requirements has been amended to reduce the burden on smaller SIPP Operators.
- UK commercial property, National Savings & Investments and UK deposit accounts have been added to a list of 'standard investments' and so will not be subject to a capital surcharge.
- SIPP Operators have been given until 1 September 2016 to comply with the revised requirements.
The FCA estimates the proposals, which are hoped will ensure that SIPP members will be protected should their Operator fail, will result in total increase in capital adequacy across the industry of around £18m. According to the regulator, if this is passed on in full to clients through higher fees, the average customer will experience a rise in costs of only approximately 0.005%. Whilst some Operators have increased their SIPP fees so as to allow for the increase in capital required, others have announced that they will be freezing fees on certain products.
Only time will tell, however, whether competition among SIPP Operators offering 'non-standard investments' will be reduced as those with greater exposure and larger capital requirements are forced to revisit their business model or exit the market. With the number of complaints from SIPP members dealt with by the FOS reportedly on the rise, and the FCA's thematic review into SIPP Operators (see our blog Slapdash SIPPs told to sharpen up by FCA) potential increases in the fees faced by members may only encourage further claims.