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FSA says capital adequacy hike means advisers may have to raise an extra £850m

The FSA has confirmed that it will double the minimum capital adequacy requirement for firms to £20,000, with the calculation based on firms’ three-month expenditure costs.

In its review of the prudential rules for personal investment firms, out today, the FSA estimates that the combined capital resources proposals will require firms to raise an additional £600-£850m of capital by 2013.

Firms will be able to include deposits of cash on current or deposit accounts as long as they can be withdrawn within 90 days. Sole traders and partners can continue to use personal assets as capital to make up any shortfall.

The regulator says it is also considering a requirement for firms to leave behind adequate resources to cover claims received after their authorisation ends.

The report also states that where firms have one or more business line excluded under their professional indemnity insurance, they will have to hold sufficient additional capital to cover the extra risk.

Transitional time limits in the report call for firms to hold a minimum of £15,000 by December 31, 2010 and at least one third of their expenditure-based requirement.

By December 31, 2011 firms must hold two thirds of their EBR and the full amount will be required by December 31, 2012.

The report states: “It is possible that, in light of the costs of the combined measures in the RDR and these capital resources proposals, some PIFs will find it no longer profitable to continue operation.”

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