The FCA is facing calls to cap the amount of money advice firms are required to hold in reserve after the regulator announced plans to conduct a “fundamental review” of capital adequacy reforms.
The proposals, which were due to be introduced between December 2013 and December 2015, would require advice firms to hold capital worth at least three months of their annual fixed expenditure, subject to a £20,000 minimum. Last week, the FCA wrote to industry trade bodies confirming implementation of the changes will be delayed by two years, pending a review.
Personal Finance Society chief executive Keith Richards says the FCA could limit capital adequacy requirements through a cap or tiered approach.
He says: “They would have impacted significantly on the medium to large advice firms who carry more fixed costs and could see requirements raise tenfold.
“The principal of any business holding a sufficient level of capital to deal with unexpected cash flow challenges, or worst, an orderly windup, has never been in dispute. Equally the principal of the calculation being based on an expenditure principle would also seem reasonable.
”However, well resourced adviser businesses would be the hardest hit if the expenditure basis is retained unless a cap or tiered approach is adopted.”
Association of Professional Financial Advisers senior technical adviser Linda Smith says: “We need to come up with a simpler and more proportionate capital adequacy regime based on the risk that a firm poses. We would certainly support a cap. If things are not changed at all it would not be viable for some firms to stay in business.”
Phil Billingham Partnership founder Phil Billingham says the FCA should go further and abandon the new capital requirements for firms who do not hold client money.
He says: “If you are not holding client money, which is the position most advice firms are in, then structures are already in place to protect consumers.”