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Aifa says new capital requirements are “unrealistic”

The Association of Independent Financial Advisers says the FSA’s new increased capital adequacy requirements are unrealistic within the timescale and risk adding a heavier cost burden to good firms.

The FSA has announced new expenditure based requirements for firms, which will require all IFAs to hold capital worth at least three months of their annual fixed expenditure, with a minimum of £20,000, by the end of 2013.

Aifa says it supports the FSA’s original objectives to provide a sustainable source of redress for consumers in the event that a firm is wound up without burdening remaining firms, but Aifa says this approach fails to meet these objectives.

Aifa director of policy Andrew Strange says: “The current proposals will see the capital requirements for all firms increase. There is a clear risk that this may result in a less sustainable sector, running counter to the FSA’s original objectives. The increase in capital required is unrealistic within the timescale set.

“The FSA’s decision to extend the deadline for implementing changes to 2013 is a positive result and Aifa worked hard to win this reprieve. Despite this, we are still far from happy with the FSA’s conclusions. Proposed regulatory changes cannot benefit consumers if they only serve to reduce the number of financially stable and viable firms in the sector from today’s level.”

Aifa is creating a working group to form a response to the FSA during its consultation on the expenditure based requirement in 2010.

Strange says: “The FSA states that they wish to consult on the application ‘of a consistent approach to the expenditure based requirements to all firms…irrespective of the firm’s business model’. We expect this consultation in 2010, and we are concerned that the implications of FSA’s possible policy direction have not yet been fully recognised by the profession.

“Due to the severity of the possible proposals Aifa is forming a working group to consider proactive solutions in advance of next year’s CP. FSA must realise the effects these proposals will have on the profession and reconsider them as a matter of urgency.”


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There are 19 comments at the moment, we would love to hear your opinion too.

  1. ….yet more rules and regulation to break the back of free enterprise…must be a plot by the marxist to get rid of the small boutique adviser …or a plot tro drive advise to the banks …which will eventually collapse so then the state can then step in and just control everything…let us look after you from the cradle to you rearly grave!…rise up…protest…dont agree!!!

  2. As a small IFA, we already ensure we have three months of expenditure in reserve and also exceed the 20k reserve that is proposed. I find it incredible that IFAs operate with such small reserves that they cannot immediately satisfy any FSA proposals.

  3. According to the Ernst & Young report, the FSA forecasts that almost a fifth of financial adviser firms are now loss-making and a further 24 per cent have reported profits of less than 5 per cent of turnover. The irony is that this is due to the collapse of the banks and falls in the market, all on the FSA watch. At a time when millions of pounds have been pumped into the banking sector to keep them afloat just look what the FSA is doing to the independent sector, the only sectors proven to have consumer confidence. The FSA have proposed changes to capital adequacy to say all firms will be required to hold a minimum of £20,000, representing double of the current level of £10,000. This is dead money sitting in a non-interest bearing account.

  4. Not sure what all the fuss is about. I’m not sure that I would want to take investment advice from anyone who found difficulty in raising £20,000

    Fortunately I’m not in charge – I would have thought that £50,000 minimum was more like it if an adviser wanted to be taken seriously.

  5. F-Pack Wooden Spoon Awards Team 20th November 2009 at 3:12 pm

    If many IFAs are making losses (just like the FSA), in that case we should be able to hold a NEGATIVE CAPITAL ADEQUACY!

    The FSA is financially and morally BANKRUPT.

  6. John, you would have to hold the £50k in cash, at say 0.5% interest, not very good business!

  7. John B – I often agree with your comments so I wanted to just look at them in a littlemore depth and for that I need to clarify your background and mine.
    Are you a directly regulated firm?
    Are you part of a firm with more than one adviser if so?
    My point is that my firm is a Ltd company and is directly regulated and I am the sole adviser. I have to hold the same basic capital adequacy as a firm which may represent significantly more risk by having more advisers. (and I hold 100% more capital adequacy and PI than the bank sales teams as I believe you will find they are exempt from both)
    The current £10k figure is the minimum assets the business should have, not cash, whilst the new rules are effectively a minimum £20k cash. Our current capital adequacy under the old rules is about £27k ignoring the cash as this fluctuates as we pay out interim dividends as soon as we know we can as I have personal borrowing and would rather NOT be paying any more interest than I have to.
    When we do our RMAR (or whatever it is called now) six monthly we review what our capital adequacy figure has fallen to due to depreciation on the assets (often computer and office equipment) we have invested in the business and then look at what it may be sensible to purchase and then effect a purchasing plan which means we have a functional business with our forward planning on this meeting our capotal adequacy. The reason it is often over £24k of assets is I (had) planned on being in business for the next 25 years, i.e.e well in to my sixties and having well over the minimum cap add figure meant I did not need to check daily we had enough working capital to meet the FSA rules.
    The change in the rules means I will have to have well OVER £50k invested in the business to avoid falling foul of the FSA rules i.e. I’ll still want up to £25k invested in the business, but I’ll now need anotehr £25k of cash just sitting there doing NOTHING and costing me interest on my personal borrowing. The actual amount I’ll need to hold to ensure I don’t get my licence removed for falling below 3 months expenditure will have to be even higher and when you then add in the fact that I may have to take time out in order to be RDR qualified (I’d been trying to do more diploma exams when still working), the real cost over a 3 year period is horrendous for someone dealing in the lower to middle earners bracket.
    I want to maintain my independance by staying clear of a Network (or a bank) where cap ad per adviser is significantly lower as I like to speak my mind (a lot of my clients come to me because I DO), but although finding an extra £20k is possible, I’m not sure I want to if it means opening my wallet even further to the FOS system (I’ve only had one complaint in 11 years and that has not gone to FOS yet and should not need to if the client’s solicitor will listen to the MP3 sound recordings of all the meetings).
    What about you John? As I said I wondered how we arrived at different conclusions on this occassion?

  8. I would not want to be given advice by a loss making IFA or even one that couldn’t raise £20k and afford to leave it on deposit at 0.5%. Here we go again shooting our feet off.

  9. £20k is the thin end of the wedge – its the 3 months expenditure figure that scares the pants off me! £100-150k more like!!
    Doesn’t the FSA realise salaried chartered advisers don’t come cheap? Perhaps they do & they would prefer we revert back to self-employed. Or maybe their motives are more sinister! Am I being paranoid?
    In any event, can someone please tell me how driving IFA’s out of business is going to benefit the consumer?

  10. £20k is the thin end of the wedge – its the 3 months expenditure figure that scares the pants off me! £100-150k more like!!
    Doesn’t the FSA realise salaried chartered advisers don’t come cheap? Perhaps they do & they would prefer we revert back to self-employed. Or maybe their motives are more sinister! Am I being paranoid?
    In any event, can someone please tell me how driving IFA’s out of business is going to benefit the consumer?

  11. F-Pack Wooden Spoon Awards Team 20th November 2009 at 5:07 pm

    Message to FC. Although I am perfectly OK myself form an adequacy and financial point of view, Mr F C shouldn’t take the moral high ground with this as it’s an extremely difficult market place, e.g. recession if you haven’t noticed, abuse from the F-Pack for many years, outrageous fees from the F-Pack with overpaid staff which we pay for. Abuse from FOS fees. I’m surprised that IFAs still exist. As someone recently told me there is no money in being an IFA, one needs to go tied. Just like the banks eh!!!

  12. John, you would have to hold the £50k in cash, at say 0.5% interest, not very good business!

  13. Don’t advisers usually recommend clients keep an “emergency fund” equivalent to 3-6 months expenditure as a cushion in case something happens?

    So why don’t they?

  14. New Model Advisor 20th November 2009 at 8:56 pm

    …it’s change you want & it’s change you get…time to drive all cowboys out of the industry. I attended a bond roadshow today & all the old timers there were clueless & they have been advising clients on money for however many years. Let’s get the exams done, let’s get the capital beefed up.

  15. Phil – I did say “I’m not sure what all the fuss is about” As a network member this is not something that concerns me directly. You clearly know a great deal about the issues and I can’t argue with that.

    My point was really more to do with attitude. I read about IFAs charging what I would consider to be quite high fees, and then I hear people saying that an increase from £10,000 ? to £20,000 is going to put them out of business.

    The idea of a high charging IFA and not being able to find another £10,000 intrigues me.
    A bit like taking investment advice from an adviser with an overdraft.

    A similar problem has existed for years with those who have claimed they could not afford to stop taking Indemnity.

    I can only repeat as a client I would not want to be advised by anyone who had difficulty finding an extra £10,000 or who needed to work on Indemnity. In much the same vain – I would want my investment adviser to have significant amounts personally invested and ideally to have survived a number of panics or crashes and in a perfect world to be the right side of 50 0:>

    More of a feeling than anything else – certainly not a view I’m willing to die for.

  16. It is a bit worrying that a significant number of IFA’s are so strapped. Maybe they have just made redundant one too many times by incompetent National IFAs. I just hope that the person who glibly talked about the old timers doesn’t have to face similar challenges at their age or should we just advocate youthenasia (not sure this is the right spelling as I am not as sharp as I used to be !)

  17. John – As I tried to point out, it is not an extra £10k, it is probably going to need an extra £30k or more and I’m not sure I am willing to put up an extra £30k when this appears to be money that can then be spent at a political whim without recourse to law as the FSA will not agree to a longstop. The extra £50k or so it is likely to cost in lost earning getting the other three CII Diploma papers I need added to the fact that despite responding to most FSA consultation papers I do think we are being ignored and “managed out” bring me to a conclusion that as a result I am seriously considering leaving before Jan 1st 2013.
    The ironoic thing is I was pretty much on target for RDR, but I just don’t see this conveyaer belt of change for changes sake stopping and to be quite honest I think I have got better thinsg to do with my life than this anymore.

  18. Richard Brown, Managing Director, Moneynotion Limi 23rd November 2009 at 10:52 am

    You don’t need £20,000 to run a small IFA business.

    How is some bright young person going to be able to set up on his own?

    I’ll grant you that there are firms which need far more than this amount, but the “one size fits all” approach is unsuitable for our profession.

  19. We will find the funds although I really do wonder why we have to when our business model is such that the costs of running my small 3 RI business are fully covered (excl Director Divs) by repeat income. We have bust a gut to build a secure good safe business model and this has cost us a lot of potential initial income to achieve.

    Why should I now prove reserve fund levels the same as someones business that will be bust tomorrow if they dont sell products?

    If I am being forced to keep funds in my business that I cant invest back into the company to improve the delivery to my clients, then let me keep them as an accrual in my P&L account off balance sheet. Why should I pay CT on funds that the FSA are saying could be taken off me at a whim?

    Now a big issue – compare with accountants and Lawyers. With bad advice they can cost their clients every bit as much as we could with incorrent advice. Indeed, incidents of rogue lawyers running off with client cash hit the papers on a regular basis. Remember they have access to client money through client accounts – we dont.

    The vast majority of accountants and lawyers run their businesses on masive overdrafts and balcnce the books on somewhat spurious earnings under the guise of work in progress. I know we have to account for WIP but most IFAs view this as future earnings not real money in the business. Oh – by the way, I spent many years as an IFA with a national firm of accountants so do have some knowledge here!

    My accountant, who is also a long term friend, is aghast at the issues we face and cannot believe what is currently and is in the future being imposed on us compaired to the other professions.

    Why FSA? Justify this in realtion to Accountants and Lawyers please!!!

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