The latest quarterly consultation from the FCA aimed to clarify whether commercial property investments will be considered a ‘standard’ or ‘non-standard’ asset under the forthcoming self-invested personal pension (SIPP) regime. In reality, however, this guidance muddied the waters even further and made it even more difficult for pension investors to select a reliable SIPP provider.
Standard vs non-standard asset
All SIPP providers will now be required to distinguish between ‘standard’ and ‘non-standard’ assets in order to calculate the capital buffer needed to protect investors. Those providers holding non-standard assets will be subject to an additional surcharge designed to shield investors from fraud and malpractice in less regulated markets.
Naturally there has been much debate and lobbying regarding which assets fall into the non-standard category, and the upshot is that the FCA has widened the list of standard investments to include a number of additional markets: including commercial property. The rationale behind the decision is that it will reduce costs for SIPP providers, increase competition and give investors a wider range of asset classes.
The 30-day rule
However, the FCA is maintaining that the so-called ‘30-day rule’ should be the primary determinant of whether an asset can be classed as standard. This means that SIPP providers may still place commercial property on either side of the standard/non-standard divide.
In its simplest form, the 30-day rule states that it must be possible for an asset to be ‘readily realised’ within 30 days, at the price stated by its most recent valuation, to be classified as ‘standard’. The latest consultation further clarifies that “for a UK commercial property, the asset should be considered to have been realised at the point that the land registry is formally notified.”
The problem is that it remains difficult for an investment company to categorically state that all commercial property investments will satisfy this rule, a problem that has led a number of providers to label commercial property as non-standard already. As a result, pension investors may not know how much capital their provider has to back up their investment.
Self-interested pension providers?
Greg Kingston, Head of Marketing at Suffolk Life, also points out far bigger risks – namely that SIPP providers will “wrongly classify risky assets as standard in order to satisfy their own capital requirements.” If this happens, legitimate providers with their clients’ best interests at heart may find it hard to compete against corner-cutting rivals: a situation nobody in the commercial property business wants.
We’re wary of preemptively pointing fingers at investment companies, but it’s worth remembering that these classifications are ‘guidance’ rather than ‘regulation’, so it may be possible for an unscrupulous few to find ways of ensuring their commercial property assets remain on the right side of the standard asset requirements.
The FCA may yet release further clarifications that solve this problem, but pension investors certainly require stronger protection from such risks. We subscribe to Head of Pensions at Talbot and Muir, Claire Trott's view that: “If the FCA wants the consumer to be equally protected wherever they choose to place their pensions, then they really should create rules rather than guidance.”