If the Cap fits …

If the Cap fits ... [Andrew Roberts]

There is two weeks to go until the consultation period on SIPP Capital Adequacy closes.

Under the FSA’s proposals, capital adequacy will change from in general firms having to hold 13 weeks of running costs to a formula based on the total value of assets held in their SIPPs, with operators allowing non-standard assets in their SIPPs such as commercial property having to hold up to 6 times as much.  What does this mean in reality – many SIPP providers having to hold 8 times as much capital just to run their business.  From 3 months to two years, though FSA are not apparently targeting two years’ expenditure.

Do their proposals come up with the right answer?  It is hard to tell, as we don’t know what they are targeting.  I have however learned a lot since 8 January 2013 – the date of the first of four AMPS round tables where we had 56 SIPP providers discuss the FSA’s proposals.

Here is what I have learned (well, some of it), different from the summary I published via AMPS.

1.  It is wholly inefficient to get a market to hold enough in capital to run down their business with no loss to consumers.  Consumers end up paying for insurance with no cross-subsidies, and will pay twice if they transfer to another provider, thrice if they transfer again etc and so on.

2.  It isn’t necessarily easy to wind-down a SIPP – yes we expect there to be willing buyers and that process can be simple, but it could be difficult too.  Let’s acknowledge that.  Everyone thinks fitting a new kitchen is easy until they actually try it the first time.

3.  The costs of doing so won’t necessarily relate to the cost of running the SIPP ordinarily, not least as you might have to use some more expensive third parties to help run the SIPP (or at least this will add a layer of cost).

4.  It would help enormously if HMRC and FSA worked together in the event that a SIPP provider did fail – as there may be more willing buyers of that business or a quicker wind-down.

5.  Those thinking of exiting the market are not ones I viewed as putting consumers at risk, which is the backbone of the FSA’s argument that a change that could force 15% of providers to exit is no bad thing.

6.  A factor of x 6 for non-standard assets is way too high, especially when you consider that most ongoing SIPP fees will be collected as normal (there may be the odd few that cause trouble).

7.  It is unacceptable that SIPP providers have to pay into the FSCS unless there is a clear statement of what compensation consumers may get back in return.

8.  The FSA know a lot about winding down SIPPs, it would be useful if they could share this so that respondents to the consultation can give a better response.  For example, how have they assessed the costs required to wind-down a SIPP?  Why is that a secret.  If we can look at the assumptions/model then it is easier for us to agree, or adjust it.

9.  A three month consultation period, over Christmas, is a very short time to get to understand FSA’s concerns, assess the proposals, engage with industry, construct a robust formula or tweak of proposals, and test that or evidence its effectiveness (notwithstanding that it is hard to test its usefulness when we do not know what we are aiming for).

10.  The best we can do is apply logic to assess what seems to be a reasonable method of calculating a result.

I am hopeful that a solution has emerged that is acceptable to FSA.  Regardless, we are already seeing regulatory drift, i.e. a drift of consumers and advisers away from regulated products given the increased regulatory interference.   That should not be seen as a good outcome of increased capital adequacy.

You can catch a useful article at Retirement Planner.

{image courtesy of FreeDigitalPhotos.net}

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