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