In its response to the consultation, Aifa says the proposals will not reduce the impact of future market failures in the sector but will simply tie-up capital.
A survey of its members showed that the current proposals could force more than 27 per cent of firms to leave the industry.
Research done by the trade body, found that over 50 per cent of firms may have to find additional capital.
Instead, Aifa is calling for the FSA to consider counter-cyclical capital requirements which would allow firms to accrue capital during boom periods that can then be used during economic downturns.
It also suggests reducing the expenditure based requirements to six weeks from thirteen, reducing minimum capital from £20,000 to £15,000 and extending the transition period to 2014.
Aifa director of policy Andrew Strange says: “As they stand, the proposals will force good firms to leave the industry – a fact crudely acknowledged by the FSA in the consultation paper – a fundamental breach of the social contract between a regulator and the regulated.
“At a time when firms large and small are struggling in a challenging economic environment, direct and specific action by a regulator that reduces consumer access to advice is alarming.
“Aifa proposes that the regulator reconsiders their work on this paper. This includes considering alternative approaches, such as counter cyclical or risk based requirements. These would be more successful at addressing the underlying issue which FSA aim to tackle.”
AIFA’s own research demonstrates that if FSA persist with the proposed requirements, over 50% of firms may have to find additional capital. Alternative approaches, which in themselves will not address the real issue, but which would minimise disruption to firms include: