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MM leader: Cap-ad rules should not penalise good advice firms

Natalie Holt Peach 250x255

Fund managers do it from time to time for asset allocation purposes. Clients also do it, particularly those of a cautious, low-risk disposition. And now advisers are being asked to do it, possibly to the detriment of their business.

I am talking about hoarding cash, or as the regulator puts it, capital adequacy. The difference being that when fund groups and consumers hold on to cash, it is an investment decision of their own choosing, perhaps due to a lack of market opportunities, or a preference for relatively safe assets. Advisers do not have the luxury of choice, and they will have to start complying with the cap ad rules sooner rather than later.

After several false starts, the FCA is about to consult on likely increases to capital adequacy requirements, with a view to start rolling these out as part of a phased process at the end of the year.

Of course, as is the way with much of the literature to emanate from Canary Wharf, we do not yet know with any certainty what the rules will look like. As a guide, the FCA has previously talked about requiring firms to hold the equivalent of three months expenditure or £20,000, whichever is higher, by the end of 2017. But it has acknowledged that given these draft proposals were first drawn up in 2009, the rules as they stand may need to be substantially revised.

The regulator has delayed introducing higher capital adequacy rules three times in the past six years. Some of the reasons have been valid, such as the RDR, and some perhaps less so, such as the crawling pace of European regulation.

It is probably reluctant to kick the can down the road yet again. But the fact remains that as we head into the unknown territory of pension freedoms, we need more advisers, not less.

Yes, those advice firms should be adequately resourced. But they should not be penalised for investing in staff or more efficient processes, as is the case at the moment. Nor should they be encouraged to divert money away from investing in their business in the name of regulatory requirements that have not been fully fleshed out.

There are some interesting ideas starting to emerge from the industry on how to move forward: linking cap-ad to income for example, or to the risk assessments carried out for professional indemnity cover.  This is one regulatory consultation in which advisers need to be invested in from the outset.

Natalie Holt is editor of Money Marketing – follow her on Twitter here


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There is one comment at the moment, we would love to hear your opinion too.

  1. I agree with your view Natalie that we need to invest in advisers and there is a real need to ensure that we all respond to this Consultation which I hope is not foreshortened because of the election. But it is not immediately obvious that good advice firms are penalised for doing that – they certainly are as far as the FSCS levy is concerned, but investing in staff is not a CA problem immediately as the rules are currently written. That may not be the case if the advisers do not perform or the business model is wrong.
    Remember, the rules are there so that a firm can be run down in an orderly manner. Is that not good business practice? Is that not TCF? Why should our CA be lower than a high risk firm – my CA is to protect my firm, our clients. The unacceptable fact is that the bad firms place a burden on good firms through the additional burden on the FSCS that they cause. And the money does not have to be held in cash – at present….

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