SIPP due diligence under the new capital requirement rules
3 January 2018
Will Self, deputy CEO, Curtis Banks Group, looks at what paraplanners need to assess when conducting due diligence on a SIPP provider, taking into account the new capital requirement rules.
The FCA’s new capital requirements were introduced in September last year. However, these were not simply a hygiene factor for SIPP operators. Freedom of Information requests have shown that some operators fund their capital requirements through debt, which is far from ideal. Others simply do not yet have the right level of capital in place.
Paraplanners need to put the question of capital adequacy right at the top of their SIPP due diligence checklist and should keep it there as long as parts of the market remain under pressure. For example, there’s been speculation lately around whether small SIPP operators will be able to survive the current regulatory climate. Size isn’t the only factor, of course, although it’s fair to say that smaller operators traditionally rely on full SIPP business.
This area of the market is being consumed by mid-market DFM and platform SIPP propositions. Without the ability to invest in the systems required to manage these competitively priced SIPPs at a profit, the longer term viability of a smaller business is put under pressure. Paraplanners therefore will want also to see a good track record of business and sustainable profit growth too.
Commercial property requires its own unique due diligence but the sustainability question should still remain top of the agenda. Advisers should be asking about the due diligence the SIPP operator completes on properties to make sure that it does not knowingly take on troublesome cases. For example, if the operator accepts vacant properties, the paraplanner should question what steps the operator takes to make sure that liquidity does not become an issue for the SIPP. The problem of illiquid assets leaving no cash for operators to collect their fees applies equally to commercial property investments.
Another issue could be environmental problems. Not all operators insist on completing environmental searches before purchasing a property, even though the cost to rectify environmental issues can easily outweigh the value of the property itself and can irretrievably damage the SIPP’s value. Similarly, paraplanners should ask how the operator looks to protect itself against unauthorised payments. A variety of situations can create unauthorised payments in relation to property investments. For example, outstanding rent can end up being classed as an unauthorised payment, as it is considered a payment to the rent payer who is holding money which should be within the pension. If an operator does not have sufficient controls around rent collection this could become a widespread problem and incur the heavy tax charges associated with unauthorised payments.
In the event of a SIPP operator struggling, it is both costly and time-consuming to transfer a SIPP and property to another provider. In the event of a failure, adviser firms may also struggle to charge fees for the work they need to do in order to restore their clients to a safe provider. Therefore, it is crucial to consider the sustainability of a SIPP operator before placing business with them.
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