Identifying which Sipp operators are prepared to meet the new requirements should now be the first due diligence question an adviser should ask. Such is the size of the capital increase that it is unsafe to assume that a Sipp operator in business today will be sufficiently capitalised to remain in business in 12 months’ time. Money Management’s survey asks providers what percentage of their business is covered in the run up to 1 September. What about those who cannot afford it?
Those who can’t
The FCA has not yet unveiled its plans for undercapitalised firms. With this in mind, let us think about consolidation. It has been one of the biggest topics of conversation in the Sipp industry surrounding whether there will be any mergers and acquisitions before the September deadline, especially as smaller companies struggle to raise funds. Should it indeed happen, it will within the next year.
In PS14/12, the FCA said that many respondents to its initial consultation expressed concerns regarding what would happen to the capital requirement if it acquired the pension book of another operator – and whether or not the acquiring firm would be able to afford it.
In response, it admitted it would result in an increase in the capital requirement and that administering a “significantly higher level” of business would be “desirable”. Interestingly, it also admits that if this were to be a “genuine” obstacle to the hypothetical acquisition, the FCA would expect the operator to approach them regularly to agree an “appropriate course of action.”
The FCA adds, “We would not expect a regulated firm to become highly leveraged when making an acquisition and would expect any necessary capitalisation to be reflected in the purchase price.”
This brings into question whether or not it would do the same for operators in September. This remains a grey area and at time of press, there is no official confirmation on this policy from the FCA. It should also be remembered that Sipp providers would have had more than two years to first calculate their capital adequacy requirements and subsequently raise sufficient funds.
Assuming a Sipp operator is prepared simply because it is authorised, regulated, and open for business is not a luxury afforded to the adviser who does not want to be caught out in the future.
What to look for
The majority of Sipp providers will – or should – operate with an excess of required capital. That prepares them for changing capital needs, taking into account fluctuations in asset values and increasing volumes of new business. How much this additional margin (or “buffer”) should be is down to the risk tolerance of each individual operator.
