FSA proposes stricter capital requirements for SIPP operators

Out-Law News | 27 Nov 2012 | 12:53 pm | 2 min. read

Firms which sell SIPPs to individuals could be required to hold four times as much capital under proposals put out for consultation by the Financial Services Authority (FSA).

The watchdog has proposed increasing the absolute minimum capital that Self Invested Personal Pension Plan (SIPP) operators must hold from £5,000 to £20,000, with additional requirements if they offer non-standard investment options. The proposed new minimum is intended to cover the cost of winding down an operator in the event of financial difficulty.

David Geale, the FSA's head of investment policy, said that the change was intended to reflect "substantial growth" in the market since the FSA began regulating SIPPs in 2007, both in terms of the amount of assets administered by firms and the range of assets held. The FSA said that some operators had failed, while others had been close to failure, since regulation began.

"While the SIPP market has grown substantially over time, the capital regime has not changed and needs bringing up to date," Geale said. "These proposals reflect the volume, range and complexity of assets now being put into SIPPs and - ultimately - will protect investors better in the unfortunate event an operator is would down. We believe these proposals are pragmatic and proportionate, but this is a consultation so we want to hear from the industry and consumer groups to ensure they are also balanced."

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. They are particularly attractive to higher paid individuals. Contributions to a SIPP count towards an individual's annual allowance for tax purposes, while benefits paid out by a SIPP count towards an individual's lifetime allowance.

Under the FSA's current oversight rules, prudential requirements for firms offering SIPPs are designed to be broadly equivalent to those for investment managers and operators of collective investment schemes. Firms are required to hold the higher of £5,000 or the equivalent of six weeks of expenditure as capital. If they hold client money, the capital requirement increases to the equivalent of 13 weeks worth of expenditure.

If approved, the FSA's proposals will see firms have to hold a minimum amount of capital based on the amount of assets under administration (AUA) by that firm with an additional capital surcharge for operators that hold "non-standard" assets, with a £20,000 minimum capital requirement. The consultation paper includes a list of "standard" assets while others, such as those invested in unregulated collective investment schemes (UCIS), will be subject to the additional surcharge. The FSA said that this was because these assets would take longer to transfer in the event that a firm has to be wound down.

Firms would be required to hold core capital, to meet the standard capital requirement, in a form that can be realised within a year. Capital held against the surcharge, to cover the risks of more complex investments, must be in a form that can be converted to cash within 30 days.

"Put simply, the more assets you have under administration the more capital you will need," Geale said. "If some of those assets happen to be more risky you will need even more."

The FSA has acknowledged that firms will need a one-year transitional period to comply with any new system, and has proposed that this would run from the second half of 2013 if its changes go ahead. Firms are encouraged to respond to the consultation by 22 February 2013.

The consultation follows a review (12-page / 274KB PDF) of SIPP providers, published by the FSA last month, which warned of "poor firm compliance with regulatory requirements". This was particularly noticeable in the areas of risk planning and mitigation, the FSA said. In addition, the majority of firms visited by the FSA as part of the review process were unable to properly explain how they applied the regulator's rules in relation to client money (CASS) to their business structure, leading in some cases to a failure to properly protect clients' assets.