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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.



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There are 15 comments at the moment, we would love to hear your opinion too.

  1. Has something changed? This information has been in the public domain for months…how is it NEWS?

  2. “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.”

    What sort of a business isn’t worth 5% of its income? If you earn £100 how hard is it to salt a fiver away?

  3. PS.

    Just cut a few expenses and you have it cracked. Perhaps getting clients to come to your office instead of swanning round the country would sort it.

  4. Trevor Harrington 8th December 2015 at 1:25 pm

    As is the case already, Companies will remove any capital and cash balances just before they throw themselves into administration, and their liabilities onto the Investors Compensation Scheme.

    The result of this CAP AD increase will simply serve to take approximately £1.5 Billion out of the economy, and will not benefit one single solitary client – I wonder if George is aware of the effect on the economy, and small financial advisers, who are already under pressure to advise more people for free.

  5. How many small, regulated, IFA businesses went under in the last year?

  6. TH ~ Exactly, It won’t make a scrap of difference to the costs of the FSCS, which is what really counts as far as the rest of us are concerned.

  7. I suspect that Trevor Harrington is right here. I would love to see the FCA’s evidence based research to back up this move. Maybe MM can ask them how much the FSCS would have saved over the past year if the CapAd had been £20K rather than £10K.

    If, as I suspect, the answer is that it wouldn’t have made a blind bit of difference, then the fact that this money will not be available for us to develop our services means further FCA forced consumer detriment.

    It’s all got to be paid for by someone and that is ALWAYS the client.

  8. Why o Why is it just financial services firms that have such restricted business covenants imposed on them?

  9. My reading of the new rules is that it reduces the choice of how the capital adequacy is held, so other than cash and commercial property you can’t use it within the business &sweat your assets, nor can you offer alternative security by a legal charge or guarantee which makes cap ad DEAD money for the business.

  10. I echo Trevor’s comments,

    Only to add, I run a one man limited company, with a turn over of circa 95k, I don’t need spare capital to purchase stock, running costs and tax ( apart from stupid levies) are known to a large degree, what the hell is the point of having £5,000 let alone £20,000 (21% of turn over) sat in my bank account doing sod all, apart from giving me more tax liability !!

    It just doesn’t make any business sense at all, and it, just make’s me so angry that some petty quango like the FCA, who has no concept of running a business or budgets feel that this will end all ills and give the consumer more protection than it has already !!


    And don’t talk to me about covering any complaints…….. in my view if your writing business that you feel will invite a complaint or you will loose the case to FOS…… then you shouldn’t be writing it !!! and those that do……. will (when caught) spend all the CA run away and dump all their liabilities for us to pick up via the FSCS….


  11. @ Anthony Fallon
    Without writing a treatise on the matter – as I understand it:

    1. In a small firm if they don’t have the £90k they go bust and put the onus on the FSCS. That’s a great result – n’est ce pas? Sure the director (proprietor) may get away with his own assets in tact (but see 2. Below).
    On the other hand if the firm has the wherewithal then pray tell what is the difference between this and the proprietor’s own lolly? It is in effect one and the same for a small company.

    2. Under company law, a director can be liable for the debts of his company in certain (not infrequent) circumstances. There will no doubt come a time when the ‘good guys’ will bring an action on those who dump onto the FSCS. And of course there is also the possibility of a regulatory fine on the individual concerned.

    I hope that gives you an insight into my reasoning. Uncomfortable isn’t it?

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