Increases in the minimum level of regulatory capital that advice firms must hold over the coming two years will force smaller businesses in the sector to merge or join with larger consolidators in the sector, according to the chief executive of national IFA Foster Denovo.
In an interview with FTAdviser, to be published later today (9 August), Mr Brosch said the increase in capital adequacy requirements could be the “biggest hurdle” facing adviser firms in near future.
Originally announced in 2009 and scheduled for full implementation by the end of this year, the new rules will force advisers to hold the greater of one month of fixed costs or £15,000 in reserve by the end of 2013. This will increase to three months of fixed costs or £20,000 by December 2015.
Mr Brosch said: “The one I think that is on the radar now which perhaps people aren’t aware of and rushing up towards us is the new financial resource requirements begin to kick in from December this year.
“That will bring about a very significant additional capital requirement and whether all of those firms out there are quite ready for that, particularly the way that it ratchets up in December 2014 and 2015.
”Firms will start to look to work more closely together... it’s a significant increase and that capital just being held across a plethora of small individual firms, it will lead to very significant financial challenges.
“I will suggest that will create firms coming together, working more closely, maybe joining or linking with a larger parent. I would expect to see consolidation growing.”
Last week, Alan Gow, founder of Berkshire-based specialist paraplanning firm Argonaut Paraplanning, said that the new capital adequacy rules will drive advisers to cut their fixed costs, and in turn should boost the amount of business that paraplanners get in order to boost efficiencies.
Mr Brosch thinks this is one of three challenges facing advisers. The other two, he says, are continuing to adapt - and understand the regulator’s requirements - in the post-RDR world and “rebuilding credibility” across the sector.
Last month, the Financial Conduct Authority revealed firms are not being clear about what proposition they are offering clients and said intermediaries must use the terms ‘restricted advice’ or ‘independent advice’ in describing their service to clients.
Mr Brosch said: “I think the current transitional turmoil will continue to cause concern. I do get a sense from others that this independent/restricted [debate] will continue to play out as well as implementing adviser charging in the way that the FCA would like us too.
“Another challenge is rebuilding credibility. The intentions are there, with the industry, the FCA and the RDR, but we really need to ensure that we drive that through but the biggest one for me is definitely the financial resource requirements, the cap ad issues.”
The full interview with Mr Brosch will be published later today.
