Again, Money Management’s survey looks more in depth at what percentage of an operator’s assets are in non-standard assets. The figure is used to help calculate a firm’s capital adequacy requirements.
Keep in mind that UK commercial property will not come under this requirement, unless it is not capable of being “readily realised” within 30 days. If it is not able to meet this, then the operator should classify it as a non-standard asset, and it should fall within its capital adequacy calculations. In CP15/19, it was classified that the 30-day point begins as soon as the land registry is formally notified.
How to calculate
The headline figure is £20,000 in reserve but there is more behind the figure than meets the eye. This amount will apply only to the smallest providers – and in reality is theoretical only – and the figures could reach the millions. The final number is calculated through three stages:
Stage one is calculated by finding the initial capital requirement (by multiplying the square root of a provider’s assets under administration and K1, a constant depending on the size of the firm – either 10,15 or 20).
Stage two involves calculating the capital surcharge. This may prove more difficult for some companies because the percentage of plans containing non-standard asset types must be measured. The square root of this figure is then multiplied by K2, a constant currently proposed at 2.5, and multiplied by the initial capital requirement found in the first stage.
Stage three is simply adding stage one to stage two to find the provider’s total capital requirement.
Remember, remember
The main clue is in the name “capital adequacy”. Providers only need to be adequate. It is important to remember that just because a company claims to have £5m banked when they only need to hold £1m does not equate to being five times better than another. It does not mean the operator is providing a good and stable service.
Capital adequacy should not be seen as a competition between providers, but an exercise of proof its assets are being held by a stable administrator.
Greg Kingston is head of communications and insight at Suffolk Life
