UK FSA consults on new capital regime for Self-Invested Personal Pension (SIPP) operators

In light of the failure and near failure of a number of SIPP operators since 2007, the FSA has concluded that its current prudential requirements are no longer sufficient to support the orderly wind-down of a SIPP operator.  The FSA has therefore today published its consultation paper on its proposed new capital regime for SIPP operators. 

Given the substantial growth of the SIPP market (both in terms of assets under administration (AUA) and range of assets held) since 2007 when SIPPs first came into the scope of FSA regulation, the FSA is concerned that if operators do not have sufficient financial resources, consumers may be harmed  if the wind-down is funded by a charge on clients’ assets, and clients may also be subject to a tax charge by HMRC to realise their assets within the SIPP. 

Those affected by the changes the FSA now proposes will mainly be SIPP operators subject to Chapter 5 of the Interim Prudential Sourcebook for Investment Firms (IPRU (INV)).  A small number of firms who hold the same permission and are not covered by other prudential regimes (who may be subject to IPRU (INV) Chapters 3 and 13) will also be affected by the proposed changes. 

The FSA considers there are two significant weaknesses in its current prudential framework for SIPP operators:

• the level of SIPP operators’ expenditure is not necessarily aligned to the size and nature of the assets they administer; and
• some asset types are significantly more difficult and costly to transfer during a wind-down scenario than others.

The FSA proposes:

• An increase in the fixed minimum capital requirement in IPRU (INV) 5.2.3(4) (a) from £5,000 to £20,000.
• In addition, a SIPP operator’s total capital requirement should be made up of two elements:
  • an initial capital requirement based on the AUA; and
  • a capital surcharge based on the percentage of underlying schemes that contain non-standard asset types (defined by reference to a set of standard assets which are capable of being accurately and fairly valued on an ongoing basis, readily realised when required (up to 30 day maximum) and for an amount that can be reconciled with the previous valuation)
• A rule requiring that proceeds of capital must be held in a form that is realisable within one year.

• The measure of financial resources for SIPP operators will be the Own Funds definition in IPRU (INV) Chapter 5 (the FSA does not consider that all the existing components of liquid capital, which include the use of Tier 3 items, such as ‘net trading book profits’ and ‘short-term qualifying subordinated loans’, are relevant to SIPP operators).

The changes will not apply to operators who may be insurers, or operators who are subject to prudential regimes other than IPRU (INV), e.g. the Prudential Sourcebook for Banks, Building Societies and Investment Firms.

The consultation closes on 22 February 2013. 

The FSA intends to publish a Policy Statement, including final rules, in the second half of 2013, and envisages that there will be a one-year transitional period between publication of the Policy Statement and the date on which the rules are implemented - to allow SIPP operators to raise the additional capital (where necessary), adjust their business model, or exit the market.