FCA's final SIPP capital adequacy rules reclassify commercial property investments as "standard"

Out-Law News | 06 Aug 2014 | 3:30 pm | 2 min. read

Providers of self-invested personal pensions (SIPPs) will not have to hold additional capital in order to be able to invest client money in commercial property, the Financial Conduct Authority (FCA) has said.

Following feedback from SIPP operators, the regulator has included commercial property in its list of "standard" assets as part of a new capital adequacy framework for the industry, as long as certain conditions are met. In its original draft, the FCA had suggested that these investments would be classed as "non-standard", meaning that firms would have had to have held more capital to match the perceived risks of these investments.

"Consultation feedback, further informed by our thematic work in the SIPP industry, has led us to agree that normally UK commercial property can be transferred between pension providers at relative ease, provided there is a purchasing party prepared to accept the asset," the FCA said in its finalised policy statement.

"There will be instances where this is not the case. For example, where the transfer of UK commercial property cannot be registered at the Land Registry, or it would take more than 30 days to transfer the asset. Where a firm identifies such an asset in its schemes it should treat the asset as non-standard," it said.

The FCA has also added physical gold bullion, National Savings and Investments products, bank account deposits and units in regulated collective investment schemes to its standard asset list following responses to its original draft, which was published in November 2012. It does not intend to introduce additional categories of asset beyond standard and non-standard, saying that this would "increase complexity with limited gain".

A SIPP is a type of personal pension plan which allows individuals to choose how their savings are invested from the full range of investments approved by the government and tax authorities. This makes them particularly attractive to higher paid individuals. Of the approximately £2 trillion of pension assets under management in the UK, about £100 billion is administered through SIPPs, according to FCA estimates.

Then-regulator the Financial Services Authority (FSA) first consulted on a new regulatory capital framework for SIPP operators in November 2012. The FCA has confirmed that SIPP operators will be required to increase their minimum capital holding from £5,000 to £20,000, with larger firms required to hold more based on a multiple of their assets under administration over the last four quarter-ends. Additional requirements will apply to firms that offer non-standard investments. This new minimum is intended to cover the cost of winding down an operator in the event of financial difficulty.

"Under the current capital requirements we have a real concern that when a SIPP operator exits the market people's pension savings could be put at risk," said Nick Poyntz-Wright, the FCA's director of long-term savings and pensions. "The new rules we have put in place will help to ensure that firms carry sufficient capital to fund an orderly closure without having a knock-on impact on consumers' pension pots."

"We have listened to the industry since our initial consultation and made a number of changes to proposed rules to ensure that they will work for better for firms helping to ensure that consumers get the best protection for their pension savings," he said.

The new requirements will come into force on 1 September 2016. The FCA is encouraging those firms that will need to raise additional capital in order to comply with the rules to start planning for this now.