That letter made it clear that the responsibility for treating customers fairly lay firmly with the Sipp operator (although this was a reinforcement of earlier directives) and this should include a robust process determining the quality of assets that a Sipp operator would hold in its book. If you were going to accept assets of an esoteric nature, you had to be able to understand them fully, weed out the chaff and ensure the accepted assets were fit for purpose and could be acquired, held, valued and disposed of in an appropriate manner.
Meeting regular demand
Operators looking to continue in this market, and include acceptance of unquoted equity, unregulated collectives, third party loans and intellectual property, to name but a few, had to have the necessary experience, expertise and knowledge to review these investments in order to meet the regulator’s demand.
To continue in this market would obviously have cost implications. Employees who are capable of in-depth asset analysis do not come cheap, and this strategy can only operate where there is sufficient volume and so enough income to warrant the expense. For several Sipp operators, the costs to continue would not have been economic and this triggered not only a change of proposition, but for some an exit from the market.
Others took the route of increasing fees to accommodate the continuing wider investment acceptance strategy, effectively reversing the fee war that had existed for a proposition that would enable their continued existence.
The impact of cap-ad rules
The FCA’s capital adequacy hikes have also been a significant contributory factor. From September 2016, the regulator has required Sipp operators to hold readily available assets to cover the costs of an orderly wind up of the business. This capital requirement is split into an initial capital requirement (ICR) and a capital surcharge (CS), the latter of which increases in line with the proportion of the operators that hold non standard assets.
Therefore continuing in a market where non-standard assets are accepted became a balancing act of accepting sufficient cases that made the continuation to accept worthwhile, while not taking on so many that capital adequacy requirements became onerous.
The holding of capital, while a necessity in itself, means setting aside capital that cannot be put to better use within the business.
Some operators took action more immediately than others, but the consequences are still emerging. One reasonably major player announced early this year that they would exit the non-standard market entirely.
