The FSA has not yet lost patience with some SIPP providers’ addiction to Unregulated Collective Investment Schemes (UCIS). But it has revealed the latest piece of a puzzle which, once complete, will reveal a blueprint to solving many of the SIPP industry’s issues.
The regulator’s announcement of CP12/19 ‘Restrictions on the retail distribution of unregulated collective investment schemes and close substitutes’ was timely. For those yet to read it, the consultation paper proposes that UCIS and other similar investments no longer be available for retail investors. CP12/19 is closely linked with the highly anticipated consultation paper on capital requirements for SIPP providers and it is worth exploring why.
The investments
The principal reason for a SIPP provider to hold capital is simply to provide a pool of money sufficient to allow an orderly wind-down of a failed business. That is straightforward enough and advisers will of course be familiar with the concept, with their own capital requirements being the subject of a similar ongoing consultation.
But not all SIPP firms are equal. They are set up in different ways, run under various regulatory regimes and hold a wide variety of investments with a broad spectrum of risk and liquidity. One size rarely fits all, yet, broadly speaking, the current rules for capital provision adopt exactly that approach.
The regulator wants to change that and has dropped several hints about linking capital requirements to investment risk. It believes that the more complicated an investment the longer it would take to wind it up, and that seems sensible.
So, for example, a SIPP provider whose business largely comprises equities and collectives would need to hold less capital then one whose book had more illiquid and complex investments, such as UCIS or property.
But why is the regulator going to act now, especially after it has taken steps to limit the availability of UCIS to new investors? After all, SIPP providers are not regularly closing down or going out of business. The answer is that some of the more risky unregulated assets, into which many scheme members are heavily invested, are not quite what they first appeared.
Meteoric growth
The SIPP market has grown rapidly, from nothing to more than a million investors in fewer than 25 years. That is the very definition of a growth market, and with it comes associated problems. Many new entrants joined during this period, their business models reliant on this strong growth, but when the growth dries up the books become harder to balance.
Growth is a difficult addiction to give up. It pays staff, pays dividends to shareholders and brings improvements to services for advisers and investors. One only has to look at the UK economy to see the consequences of negative growth (we cannot even bring ourselves not to say growth) on systems built on the foundations of indefinite positive growth.
In some sectors of the SIPP market growth has stalled. Investors have less money to invest or are unwilling to commit as much as before, and at the same time have experienced some of the biggest losses in a generation.
