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Feverish regulation in a cold climate

With the FSA’s plans to make some firms hold three months of expenditure as capital adequacy and using an educated guess, may I suggest that the following groups will be unhappy.

National IFAs.
Medium sized IFAs not in networks.
Support service companies of all sizes particularly those without a network arm.
Smaller IFAs but probably to a lesser extent.

And now a list of the happy or at least, the less unhappy.

Well capitalised nationals who may take advantage of their rivals’ pain.
Networks who want more members.
Consolidators.

Money Marketing’s view

The prudential rules paper and the timetable for the implementation of capital adequacy for IFAs are unfair and unworkable.

The plan may be well intentioned, the area in need of reform, but not this way and definitely not at this pace.

Combined with the demands on time and money of extra exams and model change, this is too much of a burden for firms most affected.

It isn’t fair for the FSA to place all this financial pressure on firms on capital adequacy and simultaneously expect them to willingly embrace a costly reform of model while getting more qualifications.

We certainly do not agree with the FSA’s contention that it has been sensitive to the cold economic climate. The pace is feverish.

No-one knows the depth of this recession, yet these requirements begin to kick in next year and increase to a maximum in 2013. Percentage wise, it is a huge increase for a national firm from one month to three months spend and even bigger for a regional firm.

It will deliver a severe shock to a lot of advisers regardless of their model and may damage just the sort of regional adviser that the FSA has been hoping would establish best practice and lead change.

Adviser firms, which a year ago were in fine fettle, may not be now. This could be the first of what may be many tough years. The cash they are being asked to find might have been invested in training or compliance or new systems to deliver better customer service and better customer contact. Or they might just need the cash for rent and the payroll and now they won’t have it.


The good news

If you are in a network currently, you are okay in terms of prudential rules. But the amount of money you will have to put aside, if you had decided to “go it alone” or were planning to some time in the future, will rise massively. Irritating as you may find dealing with your network, if you had planned to leave it may be better to stay put for now.


Five probable unintended consequences

If you take a change in model, an increase in qualifications and an increase in capital required to trade and combine it with a recession, an underperforming stock market and falling property prices, you will either get some firms going to the wall or leave them desperate to sell. It is likely that many smaller firms, probably run by older advisers, have decided to sell up anyway rather than face more qualifications. Now more may have to make that decision. Of course, every regulatory action has an impact when the FSA is so dominant. But once again the prices for adviser businesses will be depressed lower than their natural level even in a downturn. That is very unfair to advisers who have put in years of work building their businesses.

The three month expenditure measure may see advisers cutting back to keep their capital requirement down. What will they cut – compliance, training?

Access to proper advice will fall. The regulator says the report may mean some advisers leave the industry. We think the FSA has probably underestimated how many – not that they gave a figure this time around.

Pain for IFAs probably means more market share for banks.

The risk that support service business models come under pressure and that one or more fail.


One sad irony

The regime for capital adequacy needed to be addressed. It was in need in reform and a series of above inflation increases to a much higher level was probably overdue. In addition the risk of phoenixing and the fact that firms could simply cease to trade probably means the bond idea or something like it is worthy of debate. All firms have had to pay up for calls on the compensation scheme. The obvious quid pro quo would have been the long stop. Strangely, given that the regulator seems to think everything else connects, the longstop seems to have been discussed in isolation and then discounted. But with it, and a more reasonable timetable the reform might have been made palatable.


What now?

If you are affected you must work out what it means for you and answer this paper. At most half of advisers will be affected by capital adequacy changes and maybe less, so it is essential, if you are one of those firms that you make your voice heard and answer the questions in this paper.

And finally

I don’t think this helps consumers and certainly not in the short and medium term but more on that at a later date.

If you agree or disagree please email me with your views on
john.lappin@centaur.co.uk

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