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Nightmare scenario

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Owning your own business is a lifelong dream for some and it has many advantages. However, the dream may turn sour when the issues of funding and capital become increasingly complicated post-RDR.

At a time when it is de rigueur to bash a banker and loans are hard to come by, funding a business is not an easily achievable task. However, principals of adviser firms have in the past looked for external investment or dipped into their own back pockets if need be and either injected capital into their businesses in the form of a subordinated loan or have bought shares to lock in capital.

Now, for those businesses that rely on subordinated loans, life is going to be less than breezy post-2012. The regulator has decreed that because it is not stable for these loans to sit as cash, they should be restricted.

The limit on capital for a subordinated loan will be restricted to 200 percent of share capital or retained profits by the end of 2013, which will make life even harder for those advisers that were depending on these loans to keep their businesses afloat.

Furthermore, there is a double whammy. Not only is the FSA decreasing the amount of capital that can be held in a business through a subordinated loan, it is also upping the amount that has to be set aside in the first place.

The combination of these measures will result in some advisers, who were previously not concerned about their capital levels, having to stand back and take stock of their company finances.

This double blow will also affect those who pay an upfront sum for an acquired client bank.

Holding companies that are currently used to purchase client banks, due to this transaction not affecting the capital adequacy requirement of the practicing company, will no longer be able to do so after 2012. This will mean the purchase will have to be accounted for by the main authorised company as a fixed cost.

This spectre of fixed costs should start ringing all sorts of alarm bells as it will mean an increased burden on the purchaser of a higher capital adequacy requirement due to guidelines stating that post RDR the requirement will be three months fixed costs or £20,000.

It seems to me that these changes to regulations are centred on ease of regulation as businesses will have to be consolidated due to many practices being left with the millstone of higher capital adequacy levels they just cannot shirk.

Where they previously would have covered this extra cost with a subordinated loan, this is no longer possible and the end result could be more advisers elbowed out of the industry, surely damaging client interests.

Sheriar Bradbury is managing director of Bradbury Hamilton

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