The FCA’s decision to delay its up coming capital adequacy rules pending a fundamental review is to be warmly welcomed.
The rules, due to have been rolled out from December, required firms to hold the greater of four weeks expenditure or £15,000 by the end of 2013, rising to 13 weeks expenditure or £20,000 by the end of 2015.
Although the £20,000 minimum should not have been a huge problem for most small firms, the FCA’s expenditure based requirement would have had the perverse effect of penalising firms which had spent decent amounts of money on compliance, back-office systems and other staffing support costs.
The EBR would have also included the costs of PI Insurance, magnifying advisers’ exposure to any hardening of the market.
One firm we spoke to suggested its bill would have increased from £10,000 to £120,000 under the proposals.
In a note to trade bodies, the FCA says the proposals may not be consistent with the new regulator’s competition objective, presumably for some of the reasons outlined above.
The “fundamental review” should focus on whether these cap ad rules serve the purpose of protecting clients should a firm get into financial difficulty and work hand-in-hand with the regulator’s PI regime and Financial Services Compensation Scheme rules.
We have yet to see much evidence of the regulatory dividends once promised as part of the RDR. This could be one area were the regulator could look to introduce some risk weighting of firms in terms of the money that must be set aside.
Ideas could include lower rates for firms who stay away from more esoteric investments, which have caused so many problems in the past, or those with low levels of debt.
The FCA says it may need to take account of the European Banking Authority’s Capital Requirements Directive, meaning some tough negotiations could be required to ensure the particular needs of UK intermediaries are catered for.
The regulator must also ensure it listens and works closely with an advice profession which has been pointing out the flaws in these cap ad plans since they were first floated in 2008.
Advisers want a strong and sustainable sector with less likelihood of firms going bust and the inevitable FSCS bills which follow. Hopefully the FCA will listen a bit harder than its predecessor to come up with a set of rules to protect clients without penalising good practice.