James Jones-Tinsley, Self-Invested Technical Specialist at Barnett Waddingham, is unhappy over an element of the Financial Conduct Authority’s final rules on Capital Adequacy.
The regulations imply that fixed term cash deposits that cannot be realised within 30 days will have to be classed as a ‘non-standard’ asset, he explained.
Capital adequacy changes come into effect on 1 September.
Mr Jones-Tinsley, writing for sister website Sipps Professional, said: “As a result of this regulatory stance, Sipp members who hold cash in fixed-term deposits that are not readily realisable within 30 days, would be deemed as holding a non-standard asset.
“This will have adverse financial implications on Sipp operators, who have to both calculate and hold capital reserves, based on the proportion of standard and non-standard assets within their Sipp book.”
He said: “In normal circumstances, fixed-term deposits are considered standard assets, but banks have been removing break clauses from their contracts as a result of prudential regulation - more commonly referred to as ‘stress-testing’.
“These tests attempted to see how banks would cope if there was a ‘run’ - as we witnessed towards the end of the last decade - and a high proportion of deposit takers did not perform well under that test.
“As a result, some banks have chosen to remove their break clauses; so rendering the fixed-term deposit as unrealisable within 30 days.”
He said: “This ‘perfect storm’ of FCA regulation, coupled with ‘stress-testing’ consequences, creates a bizarre situation whereby Sipp operators will have to classify cash fixed-term deposits in the same category as ‘esoteric’ investments, such as a UCIS, for capital adequacy purposes.
“Faced with a current backdrop of volatile markets, where a ‘flight to cash’ is perfectly justifiable, and a textbook approach to investing, where cash is regarded as a sensible part of a diversified portfolio of different asset classes, this ‘perfect storm’ creates an inadequate outcome for both Sipp operators and their members.”