On Monday the FCA published its long awaited policy statement on the new capital adequacy requirements for SIPP operators, PS14/12, which started its life in November 2012 with the FSA. The original consultation paper proposed an initial capital adequacy requirement as well as surcharges on non-standard assets (NSAs) – including commercial property.

CP12/33 vs. PS14/12

The original initial capital requirement (ICR) was calculated by the square root of assets under administration (AUA) multiplied by 20. Faced with such a high multiplier, many smaller SIPP operators would have been forced to close down but under the PS14/12 there is a new tiered system of multipliers; 10, 15 and 20 for firms with AUA of less than £100m, £100 – £200m and greater than £200m respectively. This ICR will be based on the AUA over the last four quarter ends. In addition the proposed £20,000 fixed minimum capital requirement, up from the current £5,000, remains unaltered.

The capital surcharge calculation has changed from the percentage of schemes containing NSAs multiplied by 5 to the square root of the percentage of schemes containing NSAs multiplied by 2.5. The effect of this is to lessen the surcharge for firms with more than 25% of SIPPs containing NSAs.

The other main issue with the original paper was the classification of standard assets and NSAs; the CP defined a standard asset as one that 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. Most notably the CP did not believe that commercial property fitted these criteria, however after much lobbying this has been changed in the PS, although crucially if the property (or any standard asset) would take longer than 30 days to realise then it must be classified as a NSA.

Conclusions

Alternatives in SIPPs have come under a lot of scrutiny by the regulators in recent years. The Harlequin alert against SIPPs transfers as well as the long wait for the results of the thematic review and this policy statement left many operators feeling unclear about the regulatory landscape of alternatives. Many SIPP operators have exited the market or have shut their doors to alternative investments.

Maybe a conclusion about the alternative investments industry heading towards structures that are capable of being valued and liquidated as a sign of the sector’s maturity.

The lower capital adequacy requirements will enable more operators to stay in business, though we suspect that many will still have to close their doors. Now, there is at least some more clarity surrounding regulation making them less weary about accepting alternatives.

The full policy statement can be found here.