Andrew Roberts' Blog: Capital adequacy changes fail clarity test

Having attended two excellent events in a week - a workshop by Enhance Compliance Solutions and an Infoline conference on Sipps - I thought I would reflect on the latest thoughts on capital adequacy calculations. What's clear, is that the rules are not clear, and that's a problem. This will result in Sipp operators having to interpret the rules as they see fit, with the consequence that different operators will be holding different levels of financial resources even if their businesses are similar. This is what the regulator set out to avoid when it rewrote the capital adequacy rules. The sting in the tail is that whilst the regulator doesn't seem to be giving any further guidance on how to interpret the rules that they wrote, doubtless there will be retrospective judgement on how the rules have been applied.The biggest debating topic is commercial property. Amongst the audiences at the two events, there was differing opinions on how UK commercial property should be treated for the capital surcharge part of the calculation. At one end of the scale, when the rules mention that only assets that can be readily realised within 30 days, you might think that it is near impossible to do a conveyance within 4 weeks (just think of your own house purchase) and so all should be treated as non-standard. On the other hand, if essentially all UK commercial property is to be non-standard, then why did the FCA add it to the standard list? My opinion is that the intention is for most UK commercial property to be treated as standard, but the wording of the final rules needs adjusting as it is contradictory or ambiguous in places.{desktop}{/desktop}{mobile}{/mobile}Is there any appetite at the FCA for adjusting the wording? Well, there is no consultation on the revised rules, but surely there is mechanism for sensible updating of the rules to bring about more a robust framework? In my view, an update is needed in any event given an odd amendment to definition of Assets Under Administration (AUA).The definition of AUA – which is the key metric in the calculation - was adjusted between the proposed rules contained in CP12/33 and the final rules set out in PS14/12. The change was principally to introduce the averaging concept, to avoid large calls for or releases of capital at the quarter end.However, to my non-legal eyes, it appears that the new definition is insufficient. The original definition said that AUA is "defined as the sum of all of the values of the personal pension schemes administered by the firm." The revised definition says that AUA means "the average of the sum of the personal pension schemes administered by the firm at the latest 4 quarter end dates." {desktop}{/desktop}{mobile}{/mobile}Removing reference to values in the definition seems odd to me as the new definition reads as though it is the number of Sipps that is of relevance, rather than the value of assets contained within the Sipps.So perhaps it is sensible to amend the wording, even though the spirit of the rules would suggest it is the value that is taken. When amending the wording, clarification could be sought on whether you should use the values net of any borrowing or not (i.e. does a Sipp with a £300k property and £100k mortgage contribute the gross £300k or the net £200k to the AUA value?). From a quick glance of the cost benefit analysis, it looks to me as though the sums have be done using the net values. Gross values may make more sense if UK commercial property is indeed to be treated as standard, as by using the gross value there is an implicit premium set aside for those properties where there is borrowing.There's still time for the FCA to tidy this up and get rid of any uncertainty which surely must be a shared goal of the regulator and the Sipp industry.

Andrew Roberts' Blog: Capital adequacy changes fail clarity test

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