The clock is ticking for Non-Standard assets
Has the FCA called time on some SIPP investments?
SIPPs used to be a giant smorgasbord of investment opportunity. A product that put individuals in the same pension savings environment as companies sponsoring a Small Self Administered Scheme. But, times have changed and the Regulator has become increasingly fed up with poor due diligence, lack of integrity and often just plain daft practices in the industry that had the effect of turning consumers into victims.
The key to resolving much of this, whether wittingly or serendipitous, turned out to be the Capital Adequacy Requirement. ‘Cap Ad’ is the amount of money SIPP operators must have set aside and ringfenced as a buffer to ensure consumer protection. This now familiar aspect of life as a regulated provider revealed an ever more obvious cliff edge where certain, previously quite common, investments are concerned. What started as a brief to protect the consumer against the fall-out from a failing SIPP Operator, has rolled on to become something else as well. By defining Standard and Non-Standard assets and linking them to Capital Adequacy, the FCA have successfully priced their least favourite investments out of the market
30 is the magic number
So long as an asset can be valued at any given time and can be made liquid within thirty days, it will meet the Regulator’s criteria for Standard Assets. Where a SIPP is a fully Standard Asset SIPP, the Cap Ad requirement it creates, when expressed as a percentage, will vary depending on the SIPP value. This could be anything from 0.1% at the lower end to 1%+ for very high fund values. Any asset failing the 30 day test, will be deemed Non-Standard.
It’s sobering to note that once a SIPP contains even a nominal amount in a Non-Standard Asset, the whole fund becomes Non-Standard and could impact on the Cap Ad requirement to the tune of 0.75% or more of the fund value. What is clear is that the Cap Ad requirement only ever increases where a fund increases due to investment growth, receipt of new contributions or additional transfers.
The challenge is for operators to manage the organic, fluid nature of Cap Ad requirements within a sustainable, client focused business model.
Little of any of this is of concern to most clients and is a consideration for even fewer Professional Advisers. Yes there are clients out there who still have an appetite for investing in something that pushes their pension into the Non-Standard camp, but the lion’s share of the market is still all about low fees and ease of, well; everything.
Ultimately, as with most industries, demand for SIPPs shapes supply and supply also shapes demand. The direction of travel in recent years has been one way; to drive every element of a SIPP into the simplest and cheapest box. How much of that has been consumer led and how much not, is perhaps best left to another article. The unarguable effect is that the wishes of the Regulator have become aligned with the wishes of most providers and advisers; to de-mystify SIPPs and all but rid them of the option to stray into areas, especially investment areas, that might carry too much risk and cost for the consumer.
Know your limits
I think it’s fair to say that an ever-decreasing number of clients are investing in what would now be classed as Non-Standard assets. A handful of providers will still facilitate such investments, us included, but due diligence will be strict and the very real financial compliance cost imposed by the Regulator, bourn at least in part by the client, will have to be weighed up against the value of the anticipated return on that investment.
But in this new binary world, who bares the responsibility for correctly identifying the asset type in the first place? We would argue that everyone involved in the process needs to share that responsibility. Advisers need to understand the criteria and ask the right questions of the investment provider. Clients need to satisfy themselves that the advice they are given suits their needs and wants, and SIPP Operators must carry out their own due diligence on both the adviser and the investment.