The Financial Conduct Authority’s final rules on Capital Adequacy imply that fixed term cash deposits that cannot be realised within 30 days will have to be classed as a ‘non-standard’ asset.
Last December, the Financial Conduct Authority released Handbook Notice No. 28.
Following consultation in their Quarterly Consultation Paper No.10 (September 2015), the FCA Board made changes to their Handbook by means of the “Personal Pension Scheme Operators (Capital Requirements) (Amendment) Instrument 2015” (FCA 2015/58) which they claim “improves the clarity of our rules regarding Sipp operators”.

As with the other capital adequacy measures, this instrument comes into force on 1 September 2016.

The consultation focused on guidance on the requirement for standard assets to be realisable within 30 days.

The FCA received 18 responses to their Consultation Paper stating that the “feedback we received highlighted several areas where further clarification was requested”.

Their Handbook clarification suggests that an asset can be considered standard if:

• it is on the standard asset list
• is capable of being readily realised within 30 days, whenever required.

Understandably, some respondents were concerned as to whether unbreakable term deposits could qualify as standard assets. The FCA said yes - if both criteria above are met.

It cited examples of unbreakable deposits capable of being realised within 30 days, as well as cases with “obvious obstacles to realisation”, where the deposit will not be capable of being realised within 30 days.

The FCA then sought to draw a metaphorical line under the matter, stating: “We have decided not to clarify this further in the Handbook, because we believe the right policy principle has been set, and it should be for the firms to consider this within common practices for the specific asset market.”

What is the impact?

As a result of this regulatory stance, Sipp members who hold cash in fixed-term deposits that are not readily realisable within 30 days, would be deemed as holding a non-standard asset.

And this will have adverse financial implications on Sipp operators, who have to both calculate and hold capital reserves, based on the proportion of standard and non-standard assets within their Sipp book.

In normal circumstances, fixed-term deposits are considered standard assets, but banks have been removing break clauses from their contracts as a result of prudential regulation - more commonly referred to as “stress-testing”.

These tests attempted to see how banks would cope if there was a ‘run’ - as we witnessed towards the end of the last decade - and a high proportion of deposit takers did not perform well under that test.

As a result, some banks have chosen to remove their break clauses; so rendering the fixed-term deposit as unrealisable within 30 days.

This ‘perfect storm’ of FCA regulation, coupled with ‘stress-testing’ consequences, creates a bizarre situation whereby Sipp operators will have to classify cash fixed-term deposits in the same category as ‘esoteric’ investments, such as a UCIS, for capital adequacy purposes.

An additional unintended consequence for Sipp members is that the financial implications of this categorisation may lead to some Sipp operators not permitting fixed-term deposits as an allowable investment.

Faced with a current backdrop of volatile markets, where a ‘flight to cash’ is perfectly justifiable, and a textbook approach to investing, where cash is regarded as a sensible part of a diversified portfolio of different asset classes, this ‘perfect storm’ creates an inadequate outcome for both Sipp operators and their members.

Handbook Notice No.29 anyone?