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The Financial Services Authority (FSA) has published a consultation paper outlining how much capital Self Invested Personal Pension (SIPP) operators must hold in future.

The proposed regime reflects the growing popularity of SIPPs as a way to invest, the wide range of assets that can be placed within them, and will help protect consumers should the operator have to be wound down.

The absolute minimum capital a SIPP operator must hold will increase from £5,000 to £20,000 because experience has shown the cost of winding down an operator is unlikely to be less than this amount.

In addition to the minimum capital requirement, the FSA is proposing that an operator’s total capital requirement should take into account two further key elements:

• the amount of assets under administration (AUA); and
• an additional capital surcharge for operators that hold non standard asset types (i.e. assets that will take longer to deal with during a wind down).

Broadly speaking, the more assets an operator holds the more capital it will need - but this will only apply up to a point. While the FSA recognises that higher AUA also means greater potential risk for investors, it also offers an economy of scale in that SIPP operators can transfer some schemes (with the same assets) in bulk. See Figure 1 in the consultation paper for further explanation.

An additional capital surcharge will be applied where the operator holds non-standard assets (such as some Unregulated Collective Investment Schemes) because they will take longer to transfer in a wind-down situation. Non-standard assets can be identified by referring to a list of defined standard assets (see Notes to Editors 2).

Finally, the FSA is also proposing that core capital must be held in a form that is realisable within a year, while capital held against the surcharge must be realisable within 30 days.

David Geale, the FSA’s head of investment policy, said:

“While the SIPP market has grown substantially over time, the capital regime has not changed and needs bringing up to date. These proposals reflect the volume, range and complexity of assets now being put into SIPPs and – ultimately – will protect investors better in the unfortunate event an operator is wound down.

“Put simply: the more assets you have under administration – the more capital you will need; and if some of those assets happen to be more risky you will need even more.

“We believe these proposals are pragmatic and proportionate, but this is a consultation so we want to hear from the industry and consumer groups to ensure they are also balanced.”

The FSA recognises that the proposals will require some operators to raise significant new capital, so there will be a transitional period of one year between the publication of final rules and implementation. The consultation closes on 22^nd February 2012.

Notes for editors

1. The consultation paper.
2. All assets that do not appear on the FSA’s defined list of standard assets will be classed as non-standard. The list of standard assets includes:
   • Cash
   • Cash funds
   • Corporate bonds
   • Exchange traded commodities
   • Government and local authority bonds and other fixed interest stocks
   • Investment notes (structured products)
   • Investment trusts
   • Managed pension funds
   • Open-ended investment companies
   • Permanent interest bearing shares
   • Real estate investment trusts
   • Shares listed on: the Alternative Investment Market; the London Stock Exchange; and recognised overseas stock exchanges
   • Unit trusts

3. The FSA recently published new rules requiring SIPPs operators to provide Key Features Illustrations to consumers and show how charges impact upon a consumer’s investment return.
4. The FSA recently published the findings of a thematic review that looked at compliance of SIPP operators with FSA requirements.
5. The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; securing the appropriate degree of protection for consumers; fighting financial crime; and contributing to the protection and enhancement of the stability of the UK financial system.
6. The FSA will be replaced by the Financial Conduct Authority and Prudential Regulation Authority in 2013. The Financial Services Bill currently undergoing parliamentary scrutiny is expected to receive Royal Assent in late 2012 or early 2013, subject to the parliamentary timetable.