FCA hikes adviser cap-ad requirements

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The FCA will increase the minimum capital adequacy requirements for adviser firms to £20,000 from June next year.

Following a consultation on changing the capital resources requirements for firms offering investment advice, the FCA has confirmed it will hike the minimum requirement from the current £10,000 to £20,000 by 30 June 2016.

The new rules mean advisers will need to retain the higher of 5 per cent of their investment business annual income or £20,000.

Smaller firms will see the minimum increase staggered. They will have to meet a £15,000 minimum by 30 June 2016 and then the £20,000 requirement by the end of June 2017.

The FCA says: “This gives firms time to secure any necessary additional financial resources, whilst taking into account the fact that the deferred PS09/19 rules created an expectation that the capital resources requirements are to increase.”

The 5 per cent rule applies for adviser firms categorised as B3, which is a low resource firm with fewer than five appointed representatives or fewer than 26 investment advisers.

B1 firms (those who are dealing in investments as principal), B2 firms (where investment management is limited to portfolios containing only life policies or this is delegated to an investment firm), and certain B3 firms (which carry out the activity of managing investments in respect of portfolios containing only life policies or delegate to an investment firm) must retain the higher of 10 per cent of the annual investment income or £20,000 as capital resources.

Currently around 90 per cent of investment advice firms are only required to hold the minimum capital resources of £10,000. The existing rules are based on the adviser firm’s fixed expenditure, although it varies depending on the number of employees at a firm.

At the moment firms with up to 25 advisers pay the minimum, while those with more than 25 advisers must hold four weeks’ expenditure, or 13 weeks’ expenditure for networks.

The regulator has previously been warned the changes would hit medium-sized firms.

Apfa said businesses with 10 to 25 advisers currently paying the minimum will see their capital requirements increase drastically from next year.

It said a firm with an income of £2m would see its requirement jump from £10,000 to £100,000 as a result of the changes.

Apfa director general Chris Hannant said: “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.”

What will firms pay?

Firm 1: A B3 firm with £100,000 of total investment business income will have a capital requirement of £15,000 from 30 June 2016. This is the higher of the minimum requirement of £15,000 and the income-based requirement of £5,000. From 30 June 2017 onwards the minimum requirement will increase to £20,000.

Firm 2: A B3 firm with £500,000 of total investment business income will have a capital resources requirement of £25,000 from 30 June 2016, which is the income-based requirement.

Firm 3: A B1 firm with £100,000 of total investment business income will have a capital requirement from 30 June 2016 of £15,000. This is the higher of the minimum requirement of £15,000 and the income-based requirement of £ 10,000. From 30 June 2017 onwards the minimum requirement will increase to £20,000.