There is a massive issue in the SIPP industry at the moment: the FSA’s proposals for a new SIPP capital adequacy regime. There’s a big difference between capital adequacy and capital punishment but, nonetheless, it seems the difference needs clarifying.
Apparently, there are two sorts of people: those that divide everything in to two sorts and those that don’t. When it comes to capital adequacy, this “two sorts” type of thinking abounds. For example, there are two sorts of SIPP operator1: those that can meet the capital adequacy proposals and those that can’t.
The problem with “two sorts” is that while it appears to represent the whole population, it only looks at issues in one dimension. Rather than seeing a sphere, all you see is a circle. Here’s capital adequacy from just a few of the many alternative angles:
- Those that think that cap ad is the most important issue and those that don’t.
- Those that think that being able to meet the proposals means you run your business well and those that don’t.
- Those that think that there’s nothing wrong with the current formula and those that don’t.
- Those that think the formulae at the heart of the proposals are well-based and those that don’t.
- Those that think it’s acceptable to force industry consolidation through increasing cap ad requirements and those that don’t.
- Those that stand to gain from the new proposals and those that don’t.
- Those that speak out of self-interest and those that don’t.
- Those that manipulate the current rules to artificially suppress their current cap ad levels and those that don’t.
- Those that think the current rules need more robust enforcement and those that don’t.
- Those that complain because they can’t mean the new proposals and those that don’t.
I dare say there are some quite emotive angles there that some could get quite worked up about. Leaving the politics aside, I think it takes only two simple angles to make a point – see graphic.
I contend that there are SIPP operators within all 4 quadrants, not just the top left and bottom right of “two sorts” thinking.2 In the bottom left quadrant we see reputational risk for the market and regulator and dented peace of mind for the consumer – and, on occasions when deep pockets are emptied, consumer detriment, too. In the top right quadrant we see loss of competition, choice and innovation – but only if we look hard enough to “see” what we don’t see happening. Least apparent of all is the cost to the end client of any unnecessary fat that otherwise-healthy operators in the top left quadrant have to drag around.
It’s as well to remember that there are two sorts of people: those that use “two sorts” thinking as the basis for specious arguments and those that don’t. AMPS will have a tough job defending the top right quadrant; the FSA have a hidden enemy in the bottom left. Advisers and their clients should wish them both the best of luck.
1 A declaration of interest: I work for a SIPP operator that can meet the proposed new capital adequacy requirements. I have tried to set this aside in writing this blog. You can decide for yourself if I managed to.
2 It should be noted that it is highly unlikely that the number of end clients represented by operators in each quadrant are evenly distributed (the graphic is not intended to be to scale) but I don’t believe that excuses wrongful capital punishment.