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Capital adequacy requirements delayed by one year

The FSA has extended the deadline for its increased capital adequacy requirements from December 31, 2012 to the end of 2013.

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.”


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

  1. I do not understand why IFAs will need such a high capital adequacy requirement. As we do not handle client money, there is no risk to clients.

  2. Why do commission based-models matter in a post-RDR world (and timescale), expect in the mortgage and protection arenas, which are subject to different rules in any case…or should IFAs be reading more into this?

    The days of the sole-trader IFA with minimal resources being the norm should be put firmly into the past with the FSA more actively leading the charge on this as well as professional qualifications.

  3. Surely the FSA should realise that IFA’s have no control over the future financial storms. We are provided information for products that are supposed to of been checked by them. If that company fails they are as much to blame, in fact more. Whether we have higher capital reserves is immaterial.We still be left to take the flak. Bye bye small IFA.

  4. The Mystery Shopper for IFAs 6th November 2009 at 11:49 am

    I wonder what the FSA’s capital adequacy is?

  5. Alan Sutherland Stevens 6th November 2009 at 12:07 pm

    Limiting the risk of a firm to its requirement to hold minimum capital leaves the monitoring discipline open to different interpretation. What we should be looking at is a combination of control ‘cog wheels’ that would fit not just the calculation of straight capital requirements but a scenario where a formula to cushion those risks to the firm’s capital would require it to meet all its obligations in the event of failure to meet its debts whether it be to the market or the investor. This would leave the investor far more protected without the industry hiding behind the perfunctory disclaimer in a high risk deal of being warned by statute that investments ‘may fall, etc, etc…’ and the fund manager still gets his fee regardless. There should be a corollary pointed to the fund manager that a fee can only be earned when there is a real profit on a deal and not just on a paper figure with a marked to market calculation. The present market places no risk sufferance for the fund manager or investment firm – the fund manager is in a win win situation. The only time the firm suffers is when the capital adequacy cannot fulfil the real liability to the market at a particular date of obligation and then and only then does the investment firm fold. Recognising this array of risks that are complementary to each other would leave the onus of prudential trading on world traders without taking out the potential of big profits by investors in a free market. There would be a balance of risk sustinence by both investor and trader making it a more level playing platform.

    That’s the chant to be heard from the football terraces aimed at their manager when everyone except him can see things going wrong.

    The same chant can be heard across the country aimed at the FSA who blindingly carry on with their ‘liliputian’ regulatory system.

    An RDR they say needs to be implemented to get rid of commission because of the perceived risk yet at the same time the FSA comes out with capital adequacy rules and they say “the prudential risk issues to be similar across different business models”.

    FSA – You don’t know what you’re doing !!!

    We couldn’t make up this shambles if we tried !!!

  7. What would be useful is a clear idea of what constitutes fixed costs.

    If adviser salaries and adviser payments are excluded a level playing field can be established for both types of business.

  8. Here we go again. The regulator says something – and despite protest, confirms that it will happen, Firms revise their business plans, make future decisions based on the regulators statements and then the regulator accepts that it’s not realistic and change the proposed rules again. How on earth can we attend to the needs of the clients – if we have to keep taking time out to reconstruct our buinsess models.

  9. To anon above. The capital adequacy rules being referred to ONLY apply to PIFS, small firms which apparantly make up about 84% of advisers.
    The increase is NOT from £10k to £20k in cash required to make up capital adequacy as the current rules allow other assets on the balance sheet such as computer equipment and office furntiure to be held as part of the cap ad figure. Obbviously with depreciation teh assets book value decreased and hence either new assets needed to be bought, or cash holdings increased. the new rules effectively mean the whole £20k has to be held in cash available at 3 months notice which effectively means my onw adviser firm will no longer invest in having good hardware and nice offices for our small staff of four to enjoy as it will have to sit in cash in a bank earning less interest than I am charged on my personal mortgage OR we will have to merge with another IFA firm (perhaps with 4 IFAs) where each advisers cash awaiting distribution makes it easy to have £5k each lying around idle in order to hit the £20k limit.
    It might not sound like a lot, but it is relative and this has not been taken in to account when thinking about how realtively high the figure should be for larger firms. Correct me if I am wrong, most failures that have thrown liability across to the FSCS have been larger firms, not small IFAs (some names come to mind, but I will leave that for others to name and shame)
    Where is the logic in requiring a firm with 1 adviser to hold £20k and a firm with 10 advisers all doing the same sort of business only holding £20k too. If this is supposed to be risk based, then whilst £200k could be seen as excessive, one could easily say £50 to £100k is appropriate.

  10. 20K capital adequancy well theres a nice round figure. so whats wrong with having this in assets? is it because the FSA want their fines to be paid without delay because it helps ‘their own cash flow’ or is it an idea spawned by the bankers that are involved in the FSA think about all those 20K’s sitting in duff bank acounts working for them and not us, its a vicious circle, remember its the Banks that caused the problems in the first place now it would seem we are to put funds on deposit to help them look good, maybe I am synical but just wait till the BoE get us by the short and curleys will they really be any better

  11. I can see what the problem is, however this is not the only solution, it certainly isn’t the best, but hey, that’s how accountants think. This is the sort of thing the “consultants” like PWC would come up with, “Masters of the Universe”? History says not, can anybody name a few accountants who messed up over the last ten years?

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