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FSA vague on capital adequacy consultation

The FSA has still not set a timeframe for when its consultation paper on capital adequacy requirements will be published, despite promising a consultation this year.

In November 2009 the regulator announced that all IFAs will have to hold capital worth at least three months of their annual fixed expenditure, with a minimum of £20,000. The FSA was criticised at the time as the proposals appeared to penalise advisers who had invested significantly in back-office staff, such as administrators and paraplanners.

The prudential rules for personal investment firms are to be phased in so that firms will be required be to hold a minimum of one month’s fixed expenditure or £15,000 by December 31, 2011.

This will then go up to two months worth or £15,000 by December 31, 2012, and three months or £20,000 by the end of 2013.

At the time the FSA said that as part of this ‘expenditure-based requirement’ the regulator would “consider how to apply a consistent approach to all firms so that it will deliver a level outcome irrespective of the firms’s business model”, and said it to expected to consult on this in 2010.

But at an Institute of Financial Planning conference on the retail distribution review in London today, FSA manager of the retail distribution team Richard Taylor avoided the issue of when advisers should expect the consultation.

Page Russell chartered financial planner Tim Page raised the issue of capital adequacy, saying: “A consultation paper came out at the end of last year and the outcome is the expenditure-based requirement which penalises those firms that have paraplanners and administrators in place because they carry higher ongoing costs compared with the traditional self-employed model with a very low cost.”

He questioned whether the paper had come out and after Taylor confirmed that it had not Page asked whether its release was imminent.

In response Taylor said: “Imminent might be the wrong word.”

He did not go on to give any estimate of when further clarification about capital adequacy requirements for IFAs would be made.


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There are 7 comments at the moment, we would love to hear your opinion too.

  1. There was no cost benefit analysis in FSA original paper and it was littered with errors and inconsistencies.

    If an IFA is a crook an extra £10,000 will hardly help assuming it is really there and he hadn’t thought to lie on RMAR.

    What it will do is make it more difficult for new start ups which is anti competitive.

    The FSA just needs to move on to more important matters

  2. These requirements are difficult enough for firms struggling with RDR and the recession (which is likely to get worse)- but spare a thought for our younger, more recently qualified IFAs, struggling to set up a new practice, whilst trying to build a family and home. Unless they’re left a legacy, I think this proposition would be a practical impossibility. There is a real world out there!.

  3. The FSA continually refers to “outcomes”. When considering TCF we have to consider the “outcome” for clients.

    Where is there any evidence that the FSA considered the “outcome” for consumers when putting together RDR?

    Where is the positive outcome for consumers when more and more IFAs will struggle to provide a service for the less well off consumer?

    As Ian says, an increase in capital adequacy will not help the consumer who is fleeced by a crooked IFA?

    The FSA has lost the plot and is too proud to admit it is wrong. It continues to grow, paying ever increasing salaries to its staff. To whom is it accountable?

  4. No -one seems to be concerned with the cost of raising the extra £10,000. In order to put this aside you need to make a profit, Profits, in most cases, are taxed. So the actual cost on profits of say £20,000 is an extra £2000 per business, so add this to your £10,000 and hey presto the true cost of capital adequacy is £12,000 if you put it away next 2011/12
    Then there is the VAT – you can only claim back a low percentage of the VAT as most clients want to pay from the product so the association of repayments is a percentage of your overall costs that go to providing services for those that pay via their contract. So if only 2% of your clients want to hand over a cheque, you only get 2% back. We seem to fee paying, tax paying and soon VAT paying machines who cannot expand due to payroll costs and capital adequacy costs. It can only last so long.

  5. Why £20,000? What is the empirical evidence for this?

    You don’t need even £10,000 to run a small IFA firm from home or rented premises.

    Don’t get me wrong, firms need to be properly run: it isn’t on for a firm of financial advisors not to have its own affairs in good order.

    Arbitrary sums set by a barely competent regulator achieve very little.

  6. £20m of bonuses and a £14m overdraft with the very banks it consistently fails to regulate. Howzat for prudent financial management a responsible degree of capital adequacy?

    Ah, as David Kenmir used to say: That’s different. Isn’t it always?

  7. The old cap adequacy requirement was effectively £10k of fixed and liquid assets, less any liabilities.
    The new requirement is effectively £20k liquid, doesn’t matter if the business owns the premises, £50k of IT equipment and has NO liabilities, the £20k is on top of all other net assets.
    Anyone who invested in IT with a 5yr shelf life could previously have made use of the depreciating asset on their balance sheet as part of their capital adeqaucy. The new rules mean instead of replacing IT which is likely to be out of date by January 2013, I will instead need to hold back money I could otherwise draw to reduce my personal mortgage and keep the money sitting in the business doing NOTHING for me OR the business in a bank savings account!
    And where is the logic in me having to hold £20k, if another firm of 4 advisers only has to hold the same £20k?
    Will they allow a personal guarantee secured against my property instead so I don’t have to pay interest above the rate I can earn with a nationalise bank? I think NOT.
    Perhaps we should require all FSA staff to invest a capital adequacy sum in the FSA in case they or their employer finally get sued or have a case upheld against them under the Human Rights act.

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