For example, if a company operates 2,000 Sipps with an average fund value of just over £200,000, its initial capital requirement will be £400,000. Another firm, with same number of Sipps and an average fund value of £100,000, has an initial capital requirement of £283,000. The funds under administration are not owned by the Sipp operator, but to the clients. Why should one operator have to hold significantly more capital because the average size of their clients’ funds is greater?
The other important feature of the capital adequacy requirement is the capital surcharge. This is a sum that is added to the initial capital requirement, based on the proportion of an operator’s Sipps holding non-standard assets.
Assets
It is positive that the definition of standard assets now includes UK commercial property. But this is subject to a requirement that title can be transferred within a 30-day period. It will be interesting to know exactly how the FCA intends to check on this. The new requirement will mean operators will wish to facilitate timely property transfers. However, as it is difficult to know in advance exactly how long it will take. I anticipate problems, particularly where the member is joint owner of a property.
The calculation of the capital surcharge has been changed so that it is 2.5 times the square root of the fraction of Sipps containing non-standard investments. It is evident there is a mismatch between the calculation of initial capital requirement and capital surcharge, in that one depends on the value of the investments, whereas the other depends upon the number of Sipps. A client with £1m in a Sipp, which includes a £50,000 investment in unquoted shares, adds to the proportion of Sipps holding non-standard assets, even though it is only a very small proportion of the fund value. I fail to see why this should be so.
The combination of the initial capital requirement and capital surcharge also makes the acquisition of new business costly. If we take a company with an AUA of just over £200m and 50 per cent of its Sipps holding non-standard investments, its capital adequacy requirement is around £780,000. If the firm adds 100 new Sipps to its portfolio, with an average fund size of £100,000 and 50 per cent of those new Sipps hold non-standard investments, its capital adequacy requirement will increase by £20,000 to £802,000.
If we assume the fee income in the first year for each new Sipp is £800, the firm will increase its fee income by £80,000 but will have to put £20,000 of it (25 per cent) aside to add to its capital adequacy. This makes the cost of acquiring new business excessive; as it is worse for smaller Sipp operators, it cannot be a sensible way for the FCA to promote market competition.
