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Sipp firms tighten due diligence but bank on cap ad U-turn

by William Robins on Mar 11, 2014 at 12:56

Sipp firms tighten due diligence but bank on cap ad U-turn

Midway through the third regulatory thematic review of the Sipp sector, providers seem to have taken the hint. They have tightened up due diligence and put a price premium on risky assets. But most are still banking on a reprieve from steep capital adequacy increases for commercial property.

Last month, New Model Adviser® revealed that the Financial Conduct Authority (FCA) plans to ban some Sipp providers from taking on certain risky or illiquid investment types.

This is the first such review by the new regulator but the Sipp market’s third overall. Capital adequacy rules, first proposed in 2012 by the Financial Services Authority but yet to be finalised, include steep rises for any commercial property holdings – classed as a ‘non-standard’ asset in the draft consultation.

Industry response

Neil MacGillivray, chairman of the Association of Member Directed Pension Schemes (Amps), says Sipp providers have already responded to regulatory concerns by tightening up what investments they let in, and they have made a separate commercial decision to avoid capital adequacy increases for esoteric investments.

‘The result of the second thematic review is that businesses have looked at what market they want to be in and will come out of certain markets because of capital adequacy and due diligence on non-mainstream investments,’ he says.

‘The FCA said it was concerned about certain practices and will take action as it has before. More companies are tightening up their due diligence and controls. Maybe there will be fewer providers willing to take on more esoteric investments and they will charge a premium to do that.’

Praying for a regulatory rethink

However, MacGillivray believes the impact of plans to raise capital adequacy for commercial property has been limited. Amps and others in the industry have lobbied hard against this, and it seems most Sipp providers are banking on the FCA to pull a U-turn.

‘We have not seen a reduction in the number of firms offering commercial property other than Standard Life [which has stopped it],’ says MacGillivray. ‘Some have already sold their book of business and capital adequacy would have been a reason, so we have had some amalgamation in the market, but not as much as some would have thought.’

1 comment so far. Why not have your say?

Lee Clarke

Mar 11, 2014 at 15:46

I fully understand the concern shown by the regulator where retail investors may be "sold" some dubious investments to be held in a SIPP, however when did the FCA, rather than HMRC decide on what can and what cannot be held within a Self Administered pension, whether SIPP or SSAS?

Surely the whole purpose of a SIPP or SASS is to enable a knowledgeable business person to make a decision as to whether to hold an asset personally, in the business or in the pension. HMRC sets out the list of excluded investments for the latter route, and the normal rules governing Benefits in Kind apply to assets held in a company.

The FCA only seem to have become involved because some of the insurers traditionally associated with pensions have proved themselves incapable of managing income drawdown. So now we have retail clients using SIPPs, where a Personal Pension would hithertoo have been the normal option. Once in a SIPP, these investors start looking at totally inappropriate investments for their risk profile, knowledge or experience.

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