Sipp providers have long braced themselves for a hike in capital adequacy requirements, but the Financial Services Authority’s (FSA) planned shake-up of the rules contains a sting in the tail.
The regulator’s plans to exclude commercial property from its list of standard assets that wouldn’t attract higher capital adequacy requirements have caused a stir among providers, and not without reason.
Under the proposals, if a Sipp provider holds commercial property on its books, its capital adequacy requirement will be hiked just as much as if it holds the same amount of, say, unregulated collective investment schemes (Ucis). And there are no prizes for guessing where these higher costs would ultimately fall.
The FSA has defended its proposals by pointing to the illiquidity of commercial property. It says its plans are to ensure enough capital is set aside should a Sipp provider go bust and, given the lengthier process of transferring illiquid assets, it makes sense for providers with such assets on their books to set aside higher amounts. Liquidity, and not investment risk, is the key issue, it claims.
But that is to ignore the improvements made to commercial property transfers. While transfers may not be as easy as for a regular Oeic, they do not raise the same sort of issues as Ucis at the riskier end of the spectrum. Any asset that carries a risk it could be deemed taxable property, or for which further due diligence is needed, is not going to be an easy one to transfer.
Calls for a ‘third way’, whereby commercial property is not lumped in with such assets, are justified. Otherwise advisers, and clients, are likely to bear the increased costs.