Andrew Roberts: My reaction to capital adequacy revamp

The release of further clarification from the FCA on Sipp capital adequacy rules brings with it my return to the blogosphere. My initial reaction was not one of relief that some issues had been resolved. Rather, I was intrigued that the regulator, having resisted a second period of consultation for so long, has now decided to open up a small consultation window on these rather limited issues.The headline item I guess was the clarification on commercial property. Despite the clarification, it is still open to interpretation but the statement from FCA supports my view that they generally see UK commercial property as standard but want to make sure this does not include more esoteric types of commercial property such as hotel rooms.{desktop}{/desktop}{mobile}{/mobile}I have written before about the potential for a resource crunch whereby investment providers will simply not be able to provide the volume of valuations required by Sipp operators, who might need four times as many valuations as they had in the past.The FCA has now proposed that Sipp operators can instead use the sum of the most recent annual valuations of the personal pension plans administered by the firm over the preceding 12 months. This generally solves that issue, though the sting is the qualification “subject to any revaluation”. I am not sure this adds anything useful. The formula is a proxy, meaning that if we are approximating the Assets Under Administration (AUA), we just need to worry about any large alterations in the total AUA.It is unlikely that there would be a large systematic correction upwards in valuations, or if there was that such an increase would reflect an immediate need for the Sipp operator to hold more capital.The capital adequacy formula suppresses the impact of any increase as well. If you assume that every Sipp grows at 8% per annum, then application of the formula yields only a 2% increase in capital requirement, equivalent to changing the constant from 20 to 20.4. Given that the constant was not determined in any scientific way, it could be argued that these revaluations could be ignored. Remember, it doesn’t matter if one client’s property increases by 20%, it is what happens to the total AUA that matters.{desktop}{/desktop}{mobile}{/mobile}I would suggest that a large change in AUA is more likely to arise because of a collapse in one particular fund where the Sipp operator has a high exposure to that fund: as we may have seen at various points over the past few years. But if the revaluation is downwards, then it is better from a consumer protection point of view if the revaluation isn’t taken into account.All in all, I wouldn’t worry about making the revaluation aspect mandatory. Further, I would allow the Sipp operator to sum up all the annual valuations, work out the average value per Sipp, and then apply that average to current Sipps in force to get a proxy for the AUA.It’s interesting to note that the FCA is open to amending the final rules issued last year, as evidenced by the sensible adjustment to the standard asset list so that shares held on certain overseas stock exchanges are included. I would re-open my suggestion that perhaps the FCA should amend the definition of AUA as when I last read it, it didn’t read quite right.

Andrew Roberts: My reaction to capital adequacy revamp

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