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Apfa: New cap ad rules will hit mid-sized firms hardest

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Income-based capital adequacy rules proposed by the FCA will hit medium-sized advice firms hardest, Apfa warns.

The trade body says some firms will have to hold up to 10 times as much capital under the new rules.

In May the FCA proposed requiring firms to hold 5 per cent of the annual investment business income earned in the previous year from 30 June 2016.

The minimum capital resources requirement will increase from £10,000 currently to 15,000 on 30 June 2016, and £20,000 on 31 July 2017.

Currently firms with up to 25 advisers pay the minimum. Those with more than 25 advisers must hold four weeks’ expenditure, or 13 weeks’ expenditure for networks.

Apfa argues that firms with 10 to 25 advisers which currently pay the minimum will see their capital requirements increase dramatically from next year.

It says a firm with an income of £2m would see its requirement jump from £10,000 to £100,000.

Apfa says in its consultation response that the requirements should be staged for these firms as well as those paying the minimum.

The trade body proposes a level of 3 per cent of income by 30 June 2016, rising to 5 per cent by 31 July 2017.

Apfa director general Chris Hannant says: “Overall, we feel the proposals are sensible. But mid-sized firms will feel the biggest increase and it does not seem right that those with the furthest to go are only given a year to get there.”

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Comments

There are 6 comments at the moment, we would love to hear your opinion too.

  1. Capital Adequacy has been under discussion for some time but it is typical of the FCA’s ‘make it up as you go along’ approach to announce something in May that it then intends to implement a year later. I guess it is someone elses problem so it doesn’t matter.

    For smaller firms there is a convincing argument that the CapAd rules actually increase the likelihood of firms failing as they are denied the option of borrowing money to keep a potentially viable business afloat if it goes through a difficult patch. As soon as funds drop below £10,000 , permissions are removed, income stops and the business fails. Not a great idea.

  2. In fact… despite possibly being lynched by some in the industry… I don”t think the amounts being suggested now are high at all. If anything, advisory firms operating in the financial sphere should have suitable capital backing to give credibility to their business both to their clients and the industry? The industry wants it as then there will be a smaller number of defaults as it will be firms’ money which goes first when things become difficult and perhaps some players will be less minded to walk away and expect the FSCS to pick-up the tab when they put their business into liquidation, so we all save…

    You don’t have to keep it in cash so it can be invested and look on the bright side – it’s a great excuse to save IHT should you gift the business or pass away as the regulatory burden of holding a high chunk of investments in your business won’t be a disqualification for IHT purposes….

    I can’t imagine that many established financial advisory firms don’t have a few personal pounds behind them which they could inject into their businesses and if they haven’t – perhaps they need financial advice and guidance and to demonstrate more faith in thier own businesses with some investment!

    • With the greatest of respect Phillip, “having suitable capital gives credibility to clients and the industry” ? How do they know how much cash you have in the bank account ? do you carry your bank statement around with you…. a bit crass isn’t it ?

      Also…….”you don’t have to keep it as cash you can invest it” that’s great, as a Ltd company I can pay tax on it twice !!

      Have a read of Trevor Harringtons post below !

  3. Trevor Harrington 10th September 2015 at 5:44 pm

    Had these capital adequacy levels been in existence over the last ten years, it would not have benefited anyone during that time. As far as I am aware, not one single solitary client would have benefited.

    The fact is that when a company is about to throw itself onto the FSCS, it drains all of it’s assets and capital before doing so anyway. I have seen many cases like this over the years.

    This being the case, why are the FCA insisting that Capital adequacy should be increased at all? I would suggest that it is somebody’s pet project, within the regulator, and that they will not let it go for fear of being proved the idiots that they would obviously seem to be.

    I currently have a case just like this, concerning a company in Loughborough. They even sought, and acquired the regulators permission to close the company, and took two years to do so whilst fending off various complaints about pension transfers to their own SIPP arrangement.

    They then declared their subsidiary company to be in default concerning all those complaints, my own client’s included, and happily shovelled them all into the FSCS.

    The Ombudsman is livid, my client is livid, and I am ashamed of our regulator, who cannot seem to understand the basic functions of such bandits in business life.

  4. @Philip Milton
    Philip, you make some good points and its very rare that there isn’t an alternative argument or view point, but in all honesty, despite the well intentioned principle, how many of the cases that have gone to the FSCS would have avoided the regulatory bailout – with our money – if they had had the obligatory £10k (soon to be £15k) available in a bank account? It’s only an excess on an insurance policy after all. Most of the businesses that fail causing the FSCS to be engaged to compensate badly advised clients go down for many multiples of £10k, often many multiples of £100k! In any event, as suggested by Soren, as soon as someone gets into real financial difficulty, they will blow the ‘excess’ anyway?

  5. Trevor Harrington 11th September 2015 at 8:18 pm

    Calling Chris Hannant – get off your arse and comment please ….

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