However a new variable is also being introduced – the percentage of a firm’s client base that holds ‘non-standard’ assets. This category includes clients who hold commercial property in their Sipps, as well as investments, such as unregulated collective investment schemes, unlisted shares, unconnected loans, non-stock exchange-listed bonds and so on.
It is this second restriction that is likely to have most impact on the market. The move to AUM as the measure by which size is calculated will not change radically the capital adequacy requirements of most firms, but limits on the number of “non-standard” clients will.
So when trying to plot which firms will be hit hardest by the new regime, do not think in terms of big versus small – the decisive factor will be the firm’s exposure to non-standard (and usually illiquid) investments.
A small firm with clients who do not hold non-standard investments is no more likely to be affected than a large platform-based Sipp with lots of clients with standard investments.
This new requirement is likely to lead to some seismic shifts in the industry in the long term.
More providers are likely to stop doing non-standard business – limiting the type of investments they allow clients to hold and becoming a ‘restricted Sipp provider’.
As a result the bespoke providers who continue to offer non-standard investments will not just have to hold higher levels of capital, but may face less competition for business too. The combination of these two factors is almost certain to lead them to crank up client fees.
But it is in the short and medium term that we will see the most dramatic changes. The harsh truth is not every Sipp provider will be able to meet the new requirements, and will be forced to make some tough choices.
Those that do not go into administration will either attempt to sell their client book to another provider or team up with another firm that finds itself in the same situation.
But bear in mind that finding a willing buyer for a book of clients with lots of non-standard investments is unlikely to be easy. Realistically, the only firms that could buy such a book without falling foul of the restrictions themselves would be those that currently have a tiny proportion of non-standard clients.
The merger option is not without its complications either. All things being equal, if two providers – both with 60 per cent non-standard clients – were to tie up, the combined book would still be 60 per cent non-standard. However the combined firm will also have more capital, sufficient perhaps to meet the capital adequacy requirements.
The proposed new capital adequacy requirements are part of a broader thematic review into the Sipp market called by the City regulator.
