Complyport Comparison

Complyport Guidance Note SIPP OPERATORS CAPITAL ADEQUACY FRAMEWORK FCA has issued a Policy Statement (PS14/12) and is proposing to change the way in which financial resources are calculated for SIPP Operator firms, from one based on overheads and liquidity to one based on Assets Under Administration (AUA). In summary the financial resources regime for SIPP Operator firms will affect firms from 1 September 2016 as follows: CURRENT REQUIREMENT PROPOSED REQUIREMENT Initial Capital ‐ greater of £5,000 Initial Capital Requirement (ICR) linked to value of Assets Under Administration (AUA) [minimum £20,000] or plus 6 weeks (6/52) of relevant annual expenditure (not holding client money) Capital Surcharge (CS) based on percentage of non‐
standard assets* under administration or NB Both the Initial Capital Requirement and the Capital Surcharge are subject to capital being held in liquid form. 13 weeks (13/52) of relevant annual expenditure (holding client money) Assets corresponding to the ICR one year, the CS 30 days *Non standard assets are defined as anything not included in the list of Standard Assets. Standard Assets Bank Account Deposits Managed pension funds Cash National savings and Investment products Cash funds Permanent interest bearing shares (PIBs) Corporate bonds Real estate investment trusts (REITs) Exchange traded commodities Shares listed on: Government and local authority bonds and other fixed interest stocks the Alternative Investment Market; Physical Gold Bullion the London Stock Exchange; and recognised overseas stock exchanges Investment notes (structured products) UK commercial property Shares in Investment trusts Units in a Regulated collective investment scheme Standard Assets Criteria ‘Standard assets must be capable of being accurately and fairly valued on an ongoing basis, readily realised whenever required (up to a maximum of 30 days), and for an amount that can be reconciled with the previous valuation.’ N.B. There will be instances where this is not the case. For example, where the transfer of UK commercial property cannot be registered at the Land Registry, and/or it would take more than 30 days to transfer the asset. Where a firm identifies such an asset within its scheme(s) it should treat the asset as non‐Standard. PROPOSED NEW FINANCIAL RESOURCES FORMULA: Total Capital Requirement = ICR + CS Initial Capital Requirement (ICR) = √ AUA x K1 Capital Surcharge (CS) =( √p%) x K2 x ICR where ICR = Initial Capital Requirement ( subject to a min £20,000) AUA = Assets Under Administration K1 = Depends on AUA AUA < £100m £100‐200m >£200m K1
10
15
20
AUA is based on an average over the last 4 quarter‐ends p% = % of SIPPs in which non‐standard assets held (eg, illiquid assets including property) K2 = 2.5 WORKED EXAMPLE: Firm with 250 SIPPs and £25,000,000 of Asset Under Administration of which 40% of SIPPs hold non‐
standard asset types. Firm holds client money and has an Expenditure Based Requirement of £75,000 (being 25% of £300,000 fixed overhead). Capital Requirement Formula Calculation Initial Capital Requirement (ICR) √ AUA x K1 √ £25,000,000 = £5,000 x 10 = £50,000 Capital Surcharge (CS) p% x K2 x ICR 40% x 2.5 x £50,000 = £50,000 Total Capital Required ICR + CS £50,000 + £50,000 = £100,000 LIQUIDITY REQUIREMENT Initial Capital Requirement (ICR): funds must be held in a form that can be realised within 1 year. Capital Surcharge (CS): funds must be held in a form that can be realised within 30 days. IMPACT As you can see based on the example above, the potential impact on financial resources of non‐
standard assets held within SIPPs is significant. Without any SIPPs holding non standard assets, the Initial Capital Requirement falls from £75,000 to £50,000. When the capital surcharge is added because of SIPPs holding non standard assets, the capital requirement increases to £100,000. The impact would be even worse for a firm that did not hold client money or assets as it would currently require an expenditure based requirement of only 6/52 of annual fixed expenditure, ie, £35,000 in round figures.

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