I’m currently working on our Alternative Finance report and thought I would share some of the issues around AltFi in SIPPs I’ve been grappling with this week:
Alternative Finance investments are SIPP acceptable provided they meet the rules around taxable property, unauthorised payments and trading. (If they do not meet the rules, they will be subject to a tax charge).
Taxable property consists of residential property – including residential ground rents, timeshare/holiday homes and the grounds of residential properties – and ‘tangible moveable property’ – this includes art, antiques, fine wine and vintage cars. In effect, anything that one can touch and move potentially falls into the tangible moveable property category. In addition the scheme member and connected parties must not derive any personal use or enjoyment from the property.
Alternative Finance investments are unlikely to fall foul of this rule, unless some form of taxable property that was used as collateral for a loan ended up in an investor’s SIPP. It’s an unlikely, but not impossible scenario and its just the sort of mess that SIPP operators want to avoid. It also precludes any payments in kind or ‘rewards’ for an investment (these would be considered personal use)
Unauthorised Payments is a biggie for Alternative Finance in SIPPs. The rule is there to prevent SIPP investors making payments to ‘connected parties’ and liberating cash from their pension tax free (‘pension liberation’). In most scenarios, a loan cannot be made to a connected party without incurring tax charges, but P2P lending would make it fairly easy to circumvent the rules. Andy Leggett of Barnett Waddingham calls this ‘buddy loans’:
“Buddy loans” can be described as you take out a SIPP with A, I take one out with B. Your SIPP lends to me, my SIPP lends to you. We both default – i.e. don’t pay each other back. Now we’ve illicitly extracted funds from our pensions. operators A and B are only able to see half of this arrangement, which is a major challenge for use in a SIPP.
SIPPs and P2P platforms would need to work together to develop robust controls to prevent this from happening.
Trading. This rule is there to ensure that there is no advantage to running a business within a pension – ie doing something by way of business. Alternative Finance investments are unlikey to fall foul of this provision.
For more information on what is and is not allowable in a SIPP, go to http://www.sippinvestmentplatform.co.uk/information-about-sipps/what-incurs-tax-charges/
The SIPP Operators
Meeting the rules for SIPP acceptance is only half of the picture though. The SIPP operators themselves will only accept Alternative Finance investments if it makes commercial sense for them, and that decision might come down to the issue of whether the investment is considered ‘non-standard’ or not.
After seeing a lot of investment into esoteric assets via SIPPs (much of which was inappropriate for the investor) the FSA/FCA took several steps to clamp down on this sort of activity and protect unwary consumers.
One of the tangible outcomes has been higher capital adequacy requirements for SIPPs holding non-standard assets. Non-standard assets are defined in the negative, ie, anything that is not a standard asset ‘Standard assets must be capable of being accurately and fairly valued on an ongoing basis, readily realised whenever required (up to a maximum of 30 days), and for an amount that can be reconciled with the previous valuation’ (FSA Consultation Paper CP12/33).
If Alternative Finance platforms don’t meet these criteria, then any SIPP operators they work with will have to meet the higher capital adequacy requirements.
A more intangible outcome after the regulator’s intervention is a more wary SIPP industry. It seems that the FCA expects SIPP operators to play their part in consumer protection. This means more thorough due diligence on investments made via a SIPP and checks on appropriateness and suitability, again raising costs for the operators.
Why Should the Platforms Bother?
Quite simply, there is a lot of money in SIPPs.
According to John Moret (‘Mr SIPP’) and his MoretoSIPPs consultancy, currently there are approximately 1.2m SIPPs in the UK with £150bn in assets. Of these, 270,000 of them are full choice SIPPs controlling £70bn in assets and logic would suggest that these operators and their investors will be the first to take an interest in Alternative Finance.
The remainder are 430,000 restricted choice SIPPs with £30bn in assets and 500,000 platform SIPPs with £50bn in assets. There’s no reason why these cohorts wouldn’t eventually also invest in Alternative Finance, but at the ‘volume’ end of the market the processes will need to be quick, clean and simple to keep costs down.
Some of the bigger providers at this end of the market will negotiate preferential terms with product providers (something they are used to doing in the world of mainstream investments) or perhaps even create their own Alternative Finance platforms. We wouldn’t be surprised to see some white labelled products pop up here.
Furthermore, in the light of the new pension freedoms Moret has predicted that the SIPP industry could grow to 2m SIPPs with £300bn in assets by 2017. If the Alternative Finance platforms can crack it, this is a big market.
Conclusions
Alternative Finance is finding its way into SIPPs: Abundance Generation, Assetz, Mayfair Bridging, Proplend, Ratesetter, Rebuilding Society, ThinCats, Zopa and Wellesley & Co have all secured acceptance with some SIPP operators and there’s no doubt that the investment case for Alternative Finance also makes sense within a SIPP but there are technical and commercial barriers to overcome to make this work.
We think that the more sophisticated nature of a SIPP and SIPP investors (at least in theory) means that both equity crowdfunding and P2P lending would work within a SIPP, but we suspect more investors will be tempted by the uncorrelated, lower risk, high yield nature of P2P (and other debt instruments such as debentures) rather than the high risk/return profile of unquoted equity.
One final point. It’s estimated that 80% of SIPPs are advised, so working with financial advisers might be the key for the platforms here.
Thanks
Dan