The FCA is expected to consult on capital adequacy rules for financial advisers in the next few months.
Last year it delayed the introduction of new rules until December 2015 after questioning its own approach.
Under the current rules firms will have to hold the greater of one month’s fixed costs or £15,000 in reserve by 31 December 2015. This will rise to the greater of three months’ expenditure or £20,000 by December 2017. Now the FCA may change the rules leaving many IFA firms unsure of how much capital they will need to set aside.
Industry bodies say the current rules incentivise risky business models. They argue that firms which spend on systems, controls and staff training will have to set aside more capital than those that spend little. Firms with self-employed advisers would also have to hold less capital than those with employed advisers – despite the FCA appearing to view the former as more risky.
The Association of Professional Financial Advisers and the Institute of Financial Planning believe the FCA should adopt an income-based model. OAC Actuaries and Consultants proposes a risk-based approach, linked to a firm’s professional indemnity insurance. “It should not be beyond the realms of the regulator to match up the capital requirements to a firm’s PI premium and excess,” said Geoff Spencer, senior manager of OAC.
“The FCA are right to look again at their proposals. Linking regulatory capital to a firm’s volume of work or a risk-based model makes far more sense than an expenditure-based approach,” said James Burgoyne, Director – Claims & Technical, Brunel Professional Risks. “Whatever the outcome, we hope the FCA makes its mind up quickly to allow firms to plan, well ahead of the 31 December deadline.”
News stories about the proposed changes have been published by Money Marketing and FT Adviser.
