Morrison Blog: Doubtful if new Capital Adequacy rules are progress

The best part of two years is a long time to wait for the result of a consultation, and you would expect to see some progress after that sort of delay. The FCA SIPP capital adequacy policy statement emerged this week, just three months short of the two-year anniversary, and I must say it is a bit different to what we had in the first instance, though I'm not sure the changes count as progress. The highlights of the new rules are: • An effective date of 1 September 2016.• Lower capital requirements across the board, but particularly for smaller and medium- sized SIPP operators, which the FCA defines as those with less than £200 million in assets under administration.• Several investment classes now to be treated as standard investments, in particular UK commercial property and bank account deposits, but only if they can be readily realised within 30 days.• Assets held with discretionary fund managers will not automatically be treated as standard. DFMs will need to split their portfolios between standard and non-standard investments and provide this information to SIPP providers for capital adequacy purposes. {desktop}{/desktop}{mobile}{/mobile} The key issue that the SIPP industry was waiting to have confirmed, and which I'm sure will continue to be the subject of much debate, was the make-up of the standard investments list, in particular whether commercial property would be treated as a standard or non-standard investment. The rules define UK commercial property as a standard investment, but then add the caveat that to be treated in this way it must be capable of being realised within 30 days. So, once again, we are back to subjectivity and provider interpretation. At A-Day the Treasury left aspects of the definition of 'taxable property' open to interpretation and some might argue that this has gone some way to getting us to the point we are currently at! Back to commercial property - how many property professionals would be able to guarantee a commercial property transaction being done and dusted in 30 days? Does the 30 days need to be guaranteed, or is the possibility that the deadline can be achieved the key issue? Even the smoothest of transactions can be thrown off track. What with the vagaries of title, esoteric aspects of land law and even environmental issues, this would appear to be a difficult guarantee to give, if a guarantee is needed. In some of its other recent determinations and proclamations the FCA appears to consider hotel rooms, storage pods and overseas property as a problem. Would these be defined both as commercial property and disposable within 30 days, and so be standard? It will be interesting to see how closely the FCA looks at the various interpretations applied by different providers. The overriding feeling of the new rules is that it is not the goalposts that have moved but moreover the slope of the pitch. Back in 2012, when the consultation was launched, it seemed that the capital adequacy proposals would be the FCA's primary control on SIPP providers allowing non-standard investments. Now it is as if they have taken a back seat to the investment due diligence requirements emanating from the thematic reviews of the last few years and the recent FOS decision. The good news is that the softer capital adequacy requirements shouldn't drive as many providers out of the market – this could have left a number of investors in the lurch, struggling to find an alternative home for assets of varying degrees of toxicity. Having said that, if there are toxic investments out there and there are SIPP providers that will face enforcement for whatever reason, will there be a strong enough capital requirement to protect consumers? One argument suggests that if the recent FOS determination on SIPPs is what we are going to see going forwards, then it will stop many SIPP operators from investing in esoteric assets. They won't want to be liable and therefore the capital adequacy regime is no longer needed in the state that it was proposed. I would add that if the FCA is capable of defining standard investments – and by definition these are the investments which the regulator does not see as problems – why can't it go one step further and give the SIPP industry a permitted investment list? So how does this affect us? This is a question we are getting asked by advisers and we realise it is an important due diligence point in the choice of a SIPP operator (or Platform) – well we calculate our regulatory capital requirement on a monthly basis and it is a standard policy of the Board to hold significantly more than the minimum. We have been monitoring the position through the consultation process and the new rules will not affect our business and the process for monitoring capital will remain the same. Mike Morrison

Morrison Blog: Doubtful if new Capital Adequacy rules are progress

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