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Apfa warns advisers are not prepared for new cap-ad requirements

The Association of Professional Financial Advisers has warned firms are not prepared for the new capital requirements being phased in from the end of the year. 

The new prudential rules for personal investment firms mean all advisers must hold capital worth the greater of four weeks expenditure based requirements or £15,000 by the end of 2013, the greater of eight weeks EBR or £15,000 by the end of 2014 and the greater of 13 weeks EBR or £20,000 by the end of 2015.

APFA research, carried out by NMG Consulting, shows 88 per cent of advisers are aware of the new rules but only 51 per cent think they are clear.

Some 20 per cent of advisers say they do not currently hold £20,000, and a further 25 per cent do not know. Of these, 54 per cent say they are not sure how their firm will meet the requirement to hold £15,000 or four weeks’ EBR by the end of 2013.  

Almost 20 per cent say the firm will need the principal to invest their own resources and 5 per cent say they will require a cash injection from shareholders.

Apfa senior technical adviser Linda Smith says: “Advisers are split into haves and have nots when it comes to capital holdings. And while most know that the requirements are changing, many either still are not aware of the exact details or confident they are going to meet them.

“This is particularly alarming when you consider that the requirements for many firms could be a lot higher than £20,000, because of the expenditure based requirements. For example, a two-person firm with six staff will need to hold capital against everything that is guaranteed to go out, from salaries to lighting costs. If they have annual outgoings of £200,000, by December 2015 they will need to hold £50,000 as capital.

“Advisers are coming through a significant period of change post-RDR, but with the first set of increased capital requirements coming into effect in six months, preparing for it needs to become a priority now.”


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There are 11 comments at the moment, we would love to hear your opinion too.

  1. 20th June 2013 at 12:36 pm

    And for what purpose? By the time the firm gets into trouble and requires winding down the assets (the clients) have gone, the bank accounts stripped out and the capital held at the last GABRIEL Return disappears – assuming the valuation of the assets are accurate…. Clients do not benefit, there is no provision for future claims and the truth is that this capital is held merely to run a business without income!

  2. I have to say that I really don’t think APFA is doing their members a service with this pronouncement.

    What sort of business can’t easily fulfil these requirements? Complaining about them makes us all look like Mickey Mouse organisations. For heaven’s sake even the smallest Newsagent can qualify.

    I remember well having the same arguments when Gary Heath was blowing all hot and bothered about £10k. As I said at the time and now repeat – the historical problem with Financial Services is that all you needed was a suit and a briefcase. Even a window cleaner needed more equipment. However with the latest requirements for obtaining authorisation I can’t see anyone entering who can’t easily qualify. That would seem to imply that is those who have been around a while who have the problem. What an indictment! An experienced adviser – who advisers others on matters financial – who himself is a man of straw. You couldn’t make it up!

    Of course I do appreciate the real problem of firms who are incorporated having to hold cash or liquid assets within the business. Not a very efficient use of funds. Perhaps there could be a system of PGs – wherein the directors provide these after evidencing the fact that they personally (or severally) have the wherewithal. Houses and other non-liquid assets of course would not count. (Only cash, shares, bonds etc.)

  3. Not that it concerns me as a member of a network, but my understanding of the CapAd requirement is that it applies to FIRMS, not to individual advisers (except, of course, sole traders).

    Any adviser or small firm that’s been in business for a few years without having managed to accumulate some sort of investment portfolio worth at least £20,000 (I’ve been told that it doesn’t have to be cash locked away in some special bank account) is perhaps operating on a bit of a hand to mouth basis with little in reserve to cope with a period when things are a bit tight financially.

  4. Probably need more cap add to meet unforeseen FSCS levies required should a large firm or two go to the wall and the FCA lottery as to their fees in a few years.
    Cash held in a business is not very efficient and for those smaller firms it might be time to join a network

  5. @ Biggus Dickus

    “Not that it concerns me as a member of a network….” I would suggest it should concern you particularly, because you are a member of a network! If you’re regulated host cannot meet the new capital adequacy requirements you will be de authorised and will need to seek a new home and re authorisation, which the Honister experiences tells us is no walk in the park!

    Most network models are struggling to make profits so if I were in any network, irrespective of size, I would be asking questions of them to ensure I understood what business risks, if any, the new rules create.

  6. @samcaunt
    10/10 I am glad I am not the only one who thinks as we do on this subject!

    @bogus dickens
    Honister should have taught all network members to make sure that adviser monies are held in a separate trustee bank account as was certainly the case at BIA – just as well as it turned out.

    Check your network’s accounts and if they are looking flaky on cap ad get out now!

  7. @ Sam Caunt

    Spot On !!

  8. Question? A firm has £1m turnover and £800,000 outgoings. CA to be £200,000. According to timesheets the firm has 3 months billable hours booked as work in progress, therefore WIP is £250,000. Take a haircut of say 10% to reflect unbillable hours and the WIP is £225,000. There is your capital adequacy with no cash at bank. Does this meet FCA capital adequacy requirements?
    My other difficulty is regarding on-going adviser charges. This is different from trail which you cannot use for capital adequacy – the difference here is that the adviser charge is for on-going services which you may have already carried out. Yes, the client can switch of the adviser charge but the client agreement states that outstanding work must be paid for.
    The FCA need to clarify quite a few things but they would be better off getting rid of the CA changes.

  9. @ BG, being a directly regulated firm (unlkike you), we cannot afford to rely on “what you’ve been told). Hence most of us will have already asked the FCA, but like Sam caunt, there is still some lack of clarity. Here it is from the horses mouth though….

    Dear Phil,

    Thank you for your email of 26 April 2013 regarding the implementation of increased capital requirements for Personal Investment Firms (PIFs).

    I believe the answers to your questions are clearly outlined on the below page of the new Financial Conduct Authority (FCA) website.

    I trust that this page will answer your questions and that no further clarification is required. If this is not the case please no not hesitate to contact me on the telephone number below.

    Yours sincerely

    Peter M………
    Customer Contact Centre
    Financial Conduct Authority
    Firm Helpline: 0845 606 9966

  10. “PIFs must hold capital worth at least three months of their annual fixed expenditure in realisable assets. The minimum capital resources threshold for any firm will be £20,000 (15k Dec 2013, rising to £20k by 2015)”

    See Capital Resources Calc at annexe 2

    Unless you have a significant commercial property owned by the business, you are pretty much needing to hold £20k + sitting in cash on 3 months notice or less……

  11. Which does not answer the question – WIP is an asset. In fact you have paid tax on it. It is a billable income stream that would normally be realised within 3 months. It is accepted by accountants and is the norm. But no-one can answer a simple question with any authority! You ask a straight forward question and no-one can say with certainty what the answer is…. Ho hum.

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