The new prudential rules for personal investment firms mean all IFAs will have to hold capital worth at least three months of their annual fixed expenditure, with a minimum of £20,000.
Firms will be required to hold a minimum of one month’s fixed expenditure or £15,000 by December 31, 2011, two months worth or £15,000 by December 31, 2012 and three months or £20,000 by the end of 2013.
The FSA says it is considering how expenditure-based capital resources requirements can be applied consistently to all PIFs, particularly those with commission-based business models.
In today’s policy statement, the FSA highlights concerns that its current proposals potentially favour a network business model, or other firms with non-salaried staff or advisers.
The FSA says it considers “the prudential risk issues to be similar across different business models” and that it wants to eliminate regulatory arbitrage. However, it has not yet made any changes to this aspect of the proposals but will be consulting further.
Network chiefs had been concerned that the FSA would hit them with heavier cap ad requirements in an attempt to level the playing field. It is understood that possible proposals by the FSA to force networks to hold extra capital for their ARs or non-salaried staff were removed by the FSA at the last minute.
On professional indemnity insurance, the regulator says it will allow firms to have policy exclusion clauses but only if they hold “sufficient additional capital resources” to cover any likely liabilities.
The FSA will also consult in 2010 on an appropriate prudential regime for pension and third party administrators.
The FSA says higher capital resources will enable firms to provide redress for consumers and limit the compensation due from the Financial Services Compensation Scheme in the event that a firm is wound up.
FSA director of prudential policy Paul Sharma says: “We have listened to the industry and are phasing in the new regime to allow time for them to adapt to the changes. However, we expect firms to start considering now what resources they will need to have in place.”
Association of Independent Financial Advisers director Robert Sinclair says: “We are pleased about the extension to the timeline and we welcome the opportunity to consult further on the expenditure-based requirement.
“We need to find a way of defining expenditure that allows firms to report their costs accurately and allows the FSA to monitor firms. It is essential that the requirements do not adversely affect the network model.”