Back in 2009 the FSA published rules requiring personal investment firms to hold capital worth at least three months of their expenditure based requirement, with a minimum of £20,000. The original plan was to implement the change in stages, so firms would have to hold the full amount by December 2013. 2011 saw a change in the FSA’s plan and delayed the need for this new level of capitalwith the full requirements now due to be in place by 31 December 2015.
At the time of the original proposal in 2009, the FSA argued that the current requirement of £10,000 had not been changed since 1994. Further justification for increasing the limit was that it would ensure that firms were more likely to meet the costs of poor or unsuitable advice before they needed to close for business. This would also reduce the costs that fall on the FSCS – thereby limiting the impact of increased levies on other firms in the event of a default.
The FSA also determined that half of all PIFs already held sufficient capital to meet the new requirement. We contested those figures at the time, and given the current economic climate and the financial hit the sector has taken with the implementation of the RDR, we doubt that many firms will be holding significantly more than £10,000 now.
We fundamentally do not believe that capital is a driver of advice behaviour. The notion that firms make conscious decisions on their propensity to mis-sell, and that the capital they hold reflects this, is fundamentally wrong, and demonstrates the regulator’s lack of understanding of the culture of the advice sector.
Some PIFs choose to hold capital in excess of the proposed levels, others hold minimal amounts. This does not impact on their quality of advice and there is no evidence to suggest otherwise.
So what changes and when? There are three deadlines to meet in the phasing in of the revised capital resource through to 2015, meaning that firms must hold a minimum of one month’s (4 weeks) expenditure based requirement or £15,000 by 31 December 2013, two month’s (8 weeks) or £15,000 by 31 December 2014 and three months (13 weeks) or £20,000 by the end of 2015.
What is the EBR? As you would expect three months EBR which must be held by December 2015 will be one quarter of the annual fixed expenditure. This will include salaries, staff costs, office rent, rental or lease of equipment, etc. In short, the total of any contractual outgoings that a firm is liable for.
There are some outgoings that need not be included in the calculation – staff bonuses that are not guaranteed, emoluments of directors, partners or sole traders, etc.
Although some way off, the first staging date will be upon us before we know it and making early plans to fund for the increase is worth considering now.
Linda Smith is senior technical adviser at Apfa