FCA Policy Statement

The Financial Conduct Authority has finally published its Policy Statement (PS14/12) on a new capital framework for SIPP operators, following a consultation starting in November 2012.  The principles and framework of the increased capital requirements remain unchanged from the initial 2012 proposals, but FCA was persuaded by responses to the consultation paper to make some important changes.  Amongst these is a doubling of the transitional period for the introduction of the new framework from the one year initially proposed to two years.  The new rules will therefore come into effect on 1 September 2016.

Changes from initial proposals

As initially proposed, capital requirements will be calculated on the basis of an Initial Capital Requirement (“ICR”) linked (non-linearly) to the SIPP operator’s Assets Under Management (“AUM”) plus a Capital Surcharge (“CS”) related to the percentage of plans containing ‘non-standard assets’.  A number of adjustments have been made to the original plans:

  • The formula for calculating the ICR has been adjusted to reduce what was agreed to be a disproportionately heavy burden on smaller SIPP operators.
  • The capital requirements only need to be calculated quarterly, reducing the administrative burden on the SIPP operators.
  • A number of additional asset classes have been added to the ‘standard assets list’, i.e. these will not attract a CS penalty.  These are: bank account deposits; physical gold bullion; National Savings and Investment products; UK commercial property; and units in regulated collective investment schemes (in all cases subject to the proviso that investments should only be classified as standard assets if they could be realised within 30 days).

These changes are likely to reduce the administrative burden on SIPP operators compared to initial proposals and the extended transition period is welcome but calculation of both the ICR and the CS remain complex and, as FCA acknowledges, subject to imperfections in valuation methods. 

The addition of UK commercial property to the standard assets list will be particularly welcome to many SIPP operators.

Preparing for the transition

SIPP operators are encouraged to consider the implications for their businesses now and, in particular, they should calculate whether they are likely by 1 September 2016 to require additional capital.

FCA asks that any SIPP operator considering an exit from the market contact them in order that an orderly transition can be arranged.

The Policy Statement in Context

FCA claims that the increased capital requirements and the imposition of a CS surcharge reflect the high costs of transferring assets between schemes in the event of SIPP operator failure.  FCA intends that these changes will reduce the chance that such costs have to be funded out of pension pots and increase market confidence in the sector.

FCA refers to its ‘Dear CEO’ letter to SIPP operators dated 21 July 2014 which highlighted what it saw as the continuing failures of SIPP operators to comply with prudential rules or to carry out appropriate due diligence on proposed investments.  This followed publication of final guidance for SIPP operators in October 2013 that also drew attention to what the FCA considered to be SIPP operators’ senior management’s overconfidence in their compliance with regulatory requirements and ‘a widespread poor understanding of their regulatory responsibilities for the quality of the business they administer’.  FCA has made clear that unless it sees substantial improvement in the areas it has highlighted, it will revisit the sector, potentially imposing further capital requirement increases on SIPP operators.

Further Reading

FCA Policy Statement (PS14/12)