Other Citywire websites
Stay connected:

View the article online at http://citywire.co.uk/new-model-adviser/article/a636444

13 Sipp firms face closure from potential £54m bill

by William Robins on Nov 22, 2012 at 11:27

13 Sipp firms face closure from potential £54m bill

Planned increases in capital adequacy requirements could cost providers a combined £54 million and cause as many as 13 Sipp operators to go out of business, the Financial Services Authority (FSA) has estimated.

Earlier today the FSA published plans to hike the capital adequacy requirements for Sipp operators so the absolute minimum capital a provider will have to hold will increase from £5,000 to £20,000.

The FSA proposed there would also be an additional requirement for providers that hold ‘non-standard’ asset types such as unregulated collective investment schemes (Ucis). 

The regulator said that as a result of these proposals, operators’ capital requirements will increase by between £12 million and £54 million, depending on the proportion of non-standard assets held by providers.

The FSA said the proposals were likely to affect 75 providers, with as many as 18% of these, or 13 firms, facing closure as a result of increased capital requirements.

It said: ‘We believe operators that cannot afford to meet the requirements in this framework are not holding enough capital to leave the market in an orderly fashion, and by facilitating these exits we believe that the risk of harm to consumers is ultimately minimised.

‘We estimate that this may be in the region of 14% to 18% of the operators affected by this policy.’

The FSA said the ongoing capital compliance cost to the industry was likely to range from £700,000 to £3.3 million.

28 comments so far. Why not have your say?

Trevor Whiting

Nov 22, 2012 at 11:59

I don't get the Maths !

report this

John Burchett

Nov 22, 2012 at 12:09

Nor do I.

Article makes no sense.

report this

Roydo

Nov 22, 2012 at 12:17

Nor me!

report this

Des Pondent

Nov 22, 2012 at 12:32

Nor do they - I suspect :-)

report this

Chris Macdonald

Nov 22, 2012 at 12:38

Ditto

report this

William Robins

Nov 22, 2012 at 12:44

Thanks for your comments.

The review puts the number of 'affected Sipp providers' at 75.

It says an estimated 14% to 18% of affected providers will leave as a result of this policy.

18% of 75 is 13 (13.5 really). Therefore a worst case is 13 providers leaving.

Capital compliance cost is different to the amount of extra capital that will needed.

The latter figure ranges widely from £12 million to £54 million because it depends on how many 'non standard assets' providers hold and that can only be guessed at.

Hope this helps,

Will

report this

Man of Kent

Nov 22, 2012 at 12:49

From the FSA website -

"The absolute minimum capital a SIPP operator must hold will increase from £5,000 to £20,000 because experience has shown the cost of winding down an operator is unlikely to be less than this amount."

I think they're on safe ground there.

There is extra capital required related to assets under influence and for more 'exotic' (my word) investments.

It still looks very strange, though.

report this

Clive Rayner

Nov 22, 2012 at 12:54

So, assuming that these estimations from the FSA are true, what happens next? If 13 SIPP operators close, what happens to their clients? If they have to be moved to alternative providers this will just increase the capital adequacy requirements for the next provider, which they may not be able, or prepared, to cope with. Alternatively, the FSA could nationalise those 13 providers and we, the tax-payers, could fund the whole mess.

report this

Phillip Bray

Nov 22, 2012 at 12:59

@Man of Kent

The term 'non standard assets' also includes commercial property, which will cause many more SIPP providers to have to meet the capital surcharge, it isn't just limited to "exotic" investments.

report this

Richard Anderson

Nov 22, 2012 at 13:07

Clive has hit the nail on the head. If 13 SIPP providers close then their book of business will have to transfer somewhere. If their book consists of too high a proportion of UCIS etc then other providers are not going to take them on, because they will have to increase their cap ad still further. What then happens to those clients?

Why not have a manageable plan for them to increase their cap ad over a realistic timeframe. Those providers could also increase their charges to help cover the increased cap ad., and to better reflect the additional costs and risks of holding wider investments. Overall this is likely to cause less client detriment.

report this

Bob Donaldson

Nov 22, 2012 at 13:12

If you are a SIPP Provider and you can't put your hands on £20K then it is a poor business. I would not be happy using a SIPP provider that can't put their hands on that type of money as capital adequacy bearing in mind that they are often running client cash accounts as well.

Whilst everyone likes to hate the FSA, our industry as a whole is vastly under capitalized hence the temptation for too many people to put their hand in the till.

report this

Paul Harding

Nov 22, 2012 at 13:22

@ Bob

Client cash isnt useable within the business, I would hope!!

report this

Karl Lavery

Nov 22, 2012 at 13:29

Just a thought. With all of these SIPP providers closing and so many IFA's forecast to exit or merge with the advent of RDR, there will be a lot less for the FSA to do. Does that mean it will downsize and reduce its own cost base?

Or am I just an optimist?!

report this

Des Pondent

Nov 22, 2012 at 13:49

Wishful thinking Karl - Increasing budgets + less players = bigger levies for those that remain. Now that's the sort of maths I can do!

I admire your optimism though..........or could it be cynicism?

report this

Barman

Nov 22, 2012 at 13:51

@ Karl, the FSA deal with far more than Financial Advisers and small SIPP operations im afraid...small fish in a big financial services pond.

I agree with Bob, if you run a SIPP and dont have £20 for cap ad, your running a shakey businesss.

report this

Barman

Nov 22, 2012 at 13:56

That should read £20K - if it was £20 I would probably have a go myself!

report this

David Stephenson

Nov 22, 2012 at 14:12

We were always going to see consolidation in the SIPP provider market and increasing capital adequacy requirements will certainly accelerate this process. It is simply following suit with the reduction of life / pension providers. The survivors in the SIPP market will be those that have taken a responsible view and had the sense to control the type of assets that they have allowed within their structure taking into account the expertise and resources available. The fact that the regulations allow overseas property ( for example ) does not mean that a SIPP provider should allow this if it does not have the resources to carry out any appropriate research and due diligence in respect of this type of investment.

report this

Nick White

Nov 22, 2012 at 14:25

The key to this is not the new £20k minimum figure. That's not going to be a problem for any proper SIPP operator. The key is the formula for the new total capital requirement, which is on p.11 of the consultation paper here:

http://www.fsa.gov.uk/static/pubs/cp/cp12-33.pdf

A SIPP operator with £100m in funds, 20% of which are "non-standard", will have to hold £400k total free capital.

The free capital required doubles if the funds held quadruple.

report this

Cabot Trustees

Nov 22, 2012 at 14:26

The maths need clarifying.

The £20,000 capital adequacy applies to a SIPP provider with SIPPs worth just £1m and no commercial property.

For a smallish SIPP provider with 500 SIPPs worth £200m in total, and 40% owning a property, the capital adequacy increases from say £60,000 to £848,000 (i.e not far short of one million pounds).

The FSA estimate the cost of this capital to be 6%. This means that the amount charged to the SIPP member holding a property should increase by £200 p.a. if his SIPP provider is not forced out of business.

report this

Anthony Smith

Nov 22, 2012 at 14:30

Worth noting this only affects IPRU (INV) firms and not SIPPs provided by insurers (INSPRU) or investment firms or even banks and building societies(BIPRU) where much higher capital requirements already exist.

report this

Man of Kent

Nov 22, 2012 at 15:54

@ Nick White & Cabot Trustees

Thanks for the clarification. It starts to make sense.

report this

Steve

Nov 22, 2012 at 16:00

@ Cabot and @ Nick White

You guys should take up reporting as your comments have far more meaning than the article and the rest of the blogs.

The estimate of 13 providers is a finger in the wind guess. It could be 2 or none. What was all the panic about numbers of advisers leaving the industry because of RDR. Bookmakers would have made a killing on the guesses going around. Nobody knows - just like guessing the level of the FTSE 100 next week or in 12 months time.

report this

Paul Harding

Nov 22, 2012 at 16:39

Re the formula: does the square root apply to the AUA BEFORE the multiplier is applied, or is it (AUA x K1) before you find the square root? The answers will be wildly different. Eg a SIPP provider with 200 million of std assets could either be £282k or £63k - both still seem high to me, but £280k would be madness.

report this

Cabot Trustees

Nov 22, 2012 at 17:52

The square root only applies to AUA and not K1. There is a table in Annex 1 to the FSA's report which enables the calculations to be checked. They quote 0.5% for a medium firm and 0.5% of £200m is £1m.

As Paul says £280k would be madness but if there is 40% in normal commercial property it is 848k.

I may need to become a reporter when the market for property SIPPs closes.

report this

Paul Harding

Nov 22, 2012 at 19:18

Then this is madness on another level - with potentially grim consequences for clients.

Even if you ignore the property issue, a SIPP provider with say 2,500 clients, each with say an avge of £250,000 in their pot (lets say all in STANDARD assets for now to keep it simple) is probably only earning about £500k a year in turnover, to run the whole show. Yet their new cap ad would be ....£500k!! Why on earth does it need a full years turnover just to wind down the book? Its crazy. Surely they would do a bulk transfer if they were winding down? And even if they did individual transfers, it couldnt take 10 people more than a month or two to complete? est £50k -£75k max??

How did this get past first base - am I missing something?!?

report this

Hindsight

Nov 22, 2012 at 20:31

Looking at the definition of standard assets, almost everyone is available by a personal pension a SIPP wouldn't necessarily be needed, indeed if i sold a sipp and just held insured funds my compliance officer would be very interested, how many true SIPP operators only have exposure to standard assets?, I know the debate between a PP and a SIPP is a very old one, but have the FSA gone all out to close true SIPP business down as this CONSULTATION paper seems to indicate?.

That said move commercial property into the standard assets box and you don't have a problem. I can think of at least half a dozen physical owning property funds that would be in the standard asset box, that wont be easy to liquidate which after all is allegedly the FSA reason for increasing the solvency, consumer protection

report this

Dominic Thomas

Nov 23, 2012 at 15:54

Seems to me that this is akin to an insurance salesman going around a small village, pouring petrol on a few properties whilst shouting that people should take out insurance and deliberately lighting a match at the same time. Or have I missed something?

report this

Ian Smith CFP

Nov 26, 2012 at 14:01

Certainly seems like an attempt to wipe out the SIPP market

Low cost SIPPs will have to hold so much capital vs the fees that many will find it impossible to continue and proper bespoke SIPPs will also be unable to tie up so much cash.

Why does any measure have to be based on the size of a SIPP fund - if the money is supposed to be to wind up the provider the cost of the admin for Mrs Miggins with £20,000 will be no different to Mr Fatcat with £1,000,000

If Mr Fatcat decides out of his £1million in safe cash and gilts to put £5000 in an esoteric for a flutter suddenly the SIPP provider has to increase their capital adequacy by many times that amount.

All of this for SIPP providers who are only administering the assets not choosing them.

And it all leads to the golden senario for the FSA of just a couple of big providers left for them to police - because they have such a good record of policing big companies. If the big player goes down and they are too big for anyone else in the market to take over....

report this

leave a comment

Please sign in here or register here to comment. It is free to register and only takes a minute or two.

News sponsored by:

Long time coming: is the recovery here to stay?


Click here to watch a series of sponsored interviews with Jupiter's fund managers on the UK equity market.

Today's top headlines

More about this article:

Archive


Read more...

Nest gets a new game plan as Budget bends the rules

by Rosie Sells on Apr 23, 2014 at 11:01

Sorry, this link is not
quite ready yet