PSG response to FSA Capital Requirement Consultation
FSA CP12/33 Consultation Response – PSG SIPP Limited
Q1 Do you agree that AUA is an appropriate measure of the risk of consumer harm posed by a SIPP operator?
Both as a small specialist SIPP operator and generally, just starting out with a very small number of SIPPs, we don't agree that AUA is an appropriate or workable measure as the value of the assets in each SIPP do not impact on the ability for those assets to be dealt with in the event a SIPP operator needs to exit the market.
Values of assets can fluctuate so if an asset is valued at £1 million but drops in value to £100,000 it is illogical to suppose that the capital requirement for the SIPP operator needed to be greater when the asset was worth the higher amount when the cost of dealing with that asset is unchanged regardless of its value. One should also consider assets which rapidly gain in value such as a distressed property that is refurbished and so gains in value.
As a small operator specialising in commercial property either held directly in the SIPP or via a unitised special purpose vehicle wrapper, it is likely that assets in our SIPPs could fluctuate in value which would in turn result in an ever changing capital requirement if based on asset value which will be very challenging to manage for a small firm.
For these reasons the proposals are disproportionate to the risk that the FSA is seeking to mitigate and present an unfair and unjustified financial burden to us which as a small firm cannot so easily be coped with as say a large firm with many more resources.
Q2. Do you agree that non-standard asset types can significantly increase the costs a SIPP operator would incur in a wind-down scenario (including meeting overheads as this process is completed)?
We do not agree with this assertion, especially given our own SIPP member's investment activities. We accept that some assets may be termed non-standard and they may be illiquid but this does not necessarily add to the costs of wind down which would not involve the disposal or sale of the SIPP member's investments.
We feel that this is a question of the portability of the asset not the asset type or its liquidity. For the record, we do not have any esoteric investments in our SIPPs but we do have what the FSA appear to term as illiquid assets in the form of either directly owned UK-based commercial property or UK-based commercial property wrapped/owned in a unitised SPV (technically a UCIS except the unit trust assets are chosen by the SIPP investors) but these should not be termed non-standard and both are highly portable, especially the latter. 100% of our SIPPs hold at least £1,000 in their SIPP bank accounts, and 100% of our SIPP client's do not currently settle their fees from their SIPP but either from their company or personally although the SIPP rules and contract allow for fee settlement from any source.
There are, therefore, many options for fee settlement which will ensure income can be collected by us as SIPP Operator since contracts will continue in operation and these fees can be used to fund the wind down costs. SIPP Operators fail if there is some underlying problem but if you are disposing of your SIPP business it will be done in an orderly way and could be achieved very quickly with no impact on the client so we agree with the Associate of Member Directed Pension Schemes (AMPS) response on this subject.
It is difficult not to draw the conclusion that the FSA is seeking to prevent non-standard assets being held in a SIPP at all which we feel is a dangerous intervention by the FSA via regulatory means given that it is not for the FSA to set policy on the investments that are acceptable in an investment regulated (registered) pension scheme which is a matter for Parliament and which has already been clearly set out in the Finance Act 2004 (as amended). If the effects are to restrict the SIPP member’s ability to access the investments that the SIPP was designed to permit and allow him/her to self direct in the first place then this is wrong and to the detriment of the client.
If the aim is to ban unregulated or alternative (non-standard assets) because they are potentially dangerous and being sold to the wrong people, then the FSA should seek to ensure it is properly regulating this area at the source to prevent rogue investment providers or SIPP Operators who are not properly diligent. Any actions that force SIPP Operators out of the marketplace or restrict what in practice SIPP operators can allow their clients to do by imposing these very high capital requirements is wrong and detrimental to the client. As it is, properly run SIPP operators should be carrying out careful and comprehensive due diligence before allowing the investment into their SIPP and enforcement action should be taken on a one on one basis by the FSA.
Q3. Do you believe that it is necessary to raise the fixed minimum capital requirement and, if so, do you feel that £20k is appropriate?
Q4. Do you agree with the capital surcharge as a concept and/or feel that it is an appropriate component of the capital requirement? If not, how else would you ensure that SIPP operators hold sufficient capital to wind-down a SIPP book containing non-standard asset types?
We do not support the proposed formula. We feel that a formula based on the number of SIPPs would be more logical and should take into account that clients will continue to pay fees and that (especially in our case) we are not reliant on the cash in the SIPP for fee payment, although cash reserves are still held in each SIPP.
We support the AMPS alternative approach based on number of SIPPs.
Q5. Do you have any comments on this approach, or evidence to support an alternative approach?
We support the AMPS alternative approach based on number of SIPPs. Please refer to the AMPS submission.
Q6. Do you think that this list covers all of those asset types that would not incur additional costs should they need to be transferred to another provider? Do you think there are any other asset types that should be included in this list? And, if so, why?
We do not believe UK based commercial property should be included in the non-standard asset list. We do not agree that an asset should partly qualify for the standard list depending on whether it is readily realisable as this has no impact on the ability to transfer this asset. The object of winding down a SIPP is to move the client's investments to a new operator which does not and should not require the asset to be disposed of.
We believe the proposed capital requirements are disproportionate to the perceived issued with transferring commercial property (or any other asset) from one provider to another. Commercial property wrapped/owned in a unitised SPV is highly portable with almost no cost involved in the transfer.
Q7. Do the timescales set out above appropriately reflect the time needed to access capital in a wind-down scenario?
We agree with the AMPS answer to this question.
Q8. Would this rule change incur significant costs to your business? If so, please explain/quantify these costs. This question is only applicable to operators.
We agree with the AMPS answer to this question.
Q9. Do you agree that not all of the existing components of Liquid Capital are relevant to SIPP operators and that Own Funds is a more appropriate form of financial resources?
We agree with the AMPS answer to this question.
Q10. Do you believe that a transitional period of one year is appropriate?
No. We accept that capital requirements will increase regardless of how the FSA proceeds with this.
Regardless of the level of the increase, a period of one year is unworkable and will result in the exit of many small operators which is an unacceptable consequence, a great detriment to the consumer in general and especially to those clients who specifically wish to use a smaller, specialist provider. We support the AMPS suggestion of a transitional period of 3 years with staged implementation.
Q11. In your opinion, would this proposal lead to a significant reduction in the level of competition within the SIPP sector?
We broadly agree with the AMPS response to this question.
In addition, we and our clients feel that the proposals will have a disproportionate impact and effect on smaller organisations like us, many of which will be required to maintain significant sums on deposit, merely to stay in business as a SIPP Operator. Our clients and their advisors choose to hold their SIPPs with us as a smaller firm, because of the personal and specialist service we give them, and the confidence our clients and their advisors have in us.
Any business (not just SIPP Operators), large or small, can fail but the investments in our SIPPs are held in trust, and they will be protected in the event we went out of business. Clients therefore feel safe with a smaller, specialist operator such as us, especially with our specialist focus on commercial property which draws those clients to us.
The FSA is penalising small well run firms that find it difficult to raise capital which will force them to exit the market and then customers like ours, who have very specific needs and requirements, who are often sophisticated high net worth or entrepreneurial individuals, will be forced to use larger providers who don’t give the quality service, or have the specialist experience and expertise. These clients may now be in the minority but they are the very people who the SIPP was designed for before it became a mass market product. The industry is already commenting on the potential demise of the bespoke SIPP and the bespoke SIPP exists for those clients who wish to access the full range of investments permitted by pensions and tax law.
The small operator will have less capital to reinvest into its systems and businesses which threatens the quality of the whole operation.
The cost of new business will be far higher and although we believe clearly explained menu based fees should be a cornerstone of the SIPP (as they are in our SIPP) the high costs of new business and maintaining existing business will lead to fees based on the percentage of funds which will be to the detriment of the client and to all the efforts that have been made to make fees fair and transparent and to generate the best opportunity for consumer choice.
The proposals will in many ways lead to consumer detriment through lack of competition and poorer products and services, and it seems to us that with these proposals the FSA is seeking by regulatory means to curtail the intent of Parliament which through the Finance Act 2004 (as amended) has clearly defined what an investment regulated pension scheme is able to invest in without incurring a tax charge.
Q12. Can you provide any evidence or data that might further inform our analysis of the likely impact of our proposal?
We participated as an AMPS member firm to the AMPS round tables. Please see the main submission made to you by AMPS.