In November last year, the FCA asked Sipp operators to complete a (long) questionnaire to help them with their third thematic review. Among the 40 or so data items requested was the amount of Assets Under Administration (AUA).
Sipp operators were given 20 business days to complete the questionnaire, which also included details of underlying investments held within portfolios. Although I had just stepped down from AMPS the previous month, I recall this being a difficult task for many or most Sipp operators.
Reading the new capital requirements for Sipp operators, it strikes me that Sipp operators will have to sum up their AUA every quarter end, and declare it within 20 business days.
Whatever your thoughts on use of AUA as a means of assessing the costs of closing down a Sipp business, requiring a quarterly update has the hallmarks of being suitable on paper, but unachievable in practice. This need places much higher demands on Sipp operators than for investment providers, in four key areas:
1. Complexity: The population of clients for a Sipp operator will hold a smorgasbord of asset types sourced from a range of different investment providers.
2. Frequency: A quarterly assessment is needed, whereas investment providers only need to provide six-monthly statements.
3. Intensity: All clients must be valued at the same time, whereas investment providers could chose to spread their valuations across the period.
4. Urgency: The Sipp operator is tasked with completing the job within 20 days. There is no such deadline for an investment provider to issue, say, tax year end statements.
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I also find it odd that Sipp operators are expected to use a current valuation for investments that are easily valued, as though accuracy is critical to the calculation, but then other assets where valuations are not so easily can be estimated. Something like making a cake by finely measuring out all the flour but just chucking in the sugar and other ingredients. Certainly there is no benefit in valuing investment portfolios to the nearest pound if you have 40% of your AUA in commercial property, say.
I don't want this to sound like a grumble. When rules become "final", more focus is given to practical aspects. My reason for highlighting these points is that I believe that in all likelihood Sipp operators will struggle to do accurate assessments of their AUA, and the FCA need to be alert to this and, deep breath, work with the industry to find a practical solution.
There can be talk of daily data feeds but this isn't a realistic solution currently given the diversity of holdings. There needs to be an acceptance that if a formula using AUA is only a proxy for wind-up costs, then it shouldn't be a particular problem if the Sipp operator makes a reasonable assessment of their AUA each quarter.
This assessment could be based on a fund value within the last year, perhaps adjusted by 1% per month. This should reward those operators who invest to get more recent valuation data.
The problem with working out the AUA isn't just something with which Sipp operators have to contend. The corollary of the four points above is that there is an imbalance between the data that Sipp operators need, and the data that investment providers may be willing or able to provide. Simply put, it's no good a Sipp operator getting a system in place to make requests of investment providers if they are not bound to provide that information in the timeframes needed. Even those investment providers who have good intentions of answering valuation requests promptly may struggle to do so when faced with scores of requests from Sipp operators all at the same month-end.
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If AUA is really the right metric, then the way to solve this is to have an estimate of AUA either as described above or perhaps by replicating this by taking the number of Sipps at the quarter end and multiplying it by a reasonable estimate of the average Sipp fund value, with each Sipp operator reassessing their average Sipp fund value as frequently as they want but not less frequently than every two years. That would create capital adequacy linked to number of Sipps and AUA, which essentially what AMPS were suggesting.
Given that the cost of the capital adequacy calculation will ultimately be paid for by consumers, having a simple calculation that doesn't need additional resource is the optimum result. Put simply, does it matter if AUA is £195,376,279 including an estimated £78,000,000 in property (give or take 10%), or £194,000,000.
Andrew Roberts, Partner, Barnett Waddingham LLP
@andrewddroberts