While I have a smidgen of sympathy with the industry over implementation of the latest capital adequacy rules, I think the proposals are a very sensible idea and should have been introduced years ago.
We are meant to be a professional industry and, to be frank, if the person/firm who is advising us on how to invest our £1m hasn’t a penny to his name, what sort of impression does that give?
The requirement that a business has the equivalent of one quarter’s expenses as a permanent reserve is hardly onerous and is prudent business practice anyway. Thinking about it, the ‘investment’ a client makes is within us and the service our firms are providing so he doesn’t want to be engaged with a fly-by-night entity that hasn’t a couple of pennies to rub together and could evaporate with the wind, does he?
He wants to invest in a relationship and to know that it is likely to endure the odd rough knock in economic or business circumstances, not in someone operating out of a telephone box with a net £1 of capital, which was the old rule. So, the new rules are all proportionate to the firm’s size, after all, and for most it is likely simply to mean leaving a little more money on the balance sheet rather than taking it all out all the time. Stick a few personal investments back into the business, or a director’s loan and invest that – it all counts.
Those who are against it should lose their negativity and start promoting the changes to their clients and prospective clients as offering greater stability and confidence to them. It is also good inheritance tax planning should the adviser pop off; the cash/investments will be seen as a qualifying business asset, as is required under the regulations, and not as an excessive reserve.
Oh yes, and it would give an extra level of protection to clients, too, in that all too often clear client asset rules become muddied when some firms hit hard times – either through their lack of resources or purposeful mischief when things are going wrong. A more sensible reserve in the business at all times would diminish that risk significantly as theoretically the regulator would know about a problem much earlier (as a financial resource failure arises in the regular reporting).
Issues with professional indemnity and the FSCS would also result in fewer calls on other advisers as each firm would have a bigger reserve to be exhausted first. That could mean that PI and FSCS levies for firms fall .
Yes, it’s a barrier to entry and competition, but not as much as the other regulatory requirements. But again, professional advisers should see that as a positive thing for their business, not a negative one.
Philip J Milton & Co