#3 Uncontrollable calls for capital lead to non-robust business models

Number 3 in a series of headscratchers about SIPP capital adequacy proposals

A significant unpredicted increase in capital requirement could occur from one quarter (or year) to another which, as well as not necessarily reflecting the additional capital required for an orderly wind-down as noted above, could in future cause the SIPP operator to fail to meet the new Capital Requirement even after meeting it for a number of years.

By way of example, a SIPP operator with 5000 SIPPs whose average size is £200,000 would have AUA of £1,000m. The ICR would be £632k. With 40% in non-standard assets, the total requirement would be three times this, at £1.896m. A 15% increase in market values would equate to an increase in capital requirement to £2.035m, i.e. an increase of £139k which would need to be provided to the business at short notice, and the SIPP operator cannot run its business in any way to mitigate this.

Additional unexpected calls for capital could also be required if there is a material change in the percentage of plans that hold Non-Standard Assets – this could be as a result of an adviser deciding that all of their clients should have a small exposure to an esoteric investment for diversity and putting this strategy in place over a short period of time, possible by using technology.

A business should not be exposed to these unexpected calls for capital.

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