Earlier this afternoon (28 May) the Financial Conduct Authority launched a consultation on advisers’ capital requirements. Here we dig a bit deeper into the paper to pick out the key themes that will define how it affects your business.
1. Your capital reserve minimum will double.
To briefly re-cap, the proposed provisions mean a personal investment firm will be subject to a minimum capital resources requirement that is the higher of £15,000 from 30 June 2016, then £20,000 from 30 June 2017; or 5 per cent of the firm’s annual income.
For those firms that, for example, hold client money, this income percentage may rise to 10 per cent. Other larger firms that qualify to hold larger sums under the EU Mifid directive will have to hold this new reserve in addition to their other required sums.
The minimum amount doubling was already known, of course, and was the key element in proposals that were due to come in at the end of this year but that were put up for further review in 2013.
2. It’s all about claims.
While capital adequacy is all about potential failure, the FCA understandably seems more concerned with claims against failed firms and the costs to the rest of the industry. Given the recent hike in FSCS levies, this will be music to the ears of many advisers.
The paper states an average redress claim for a pension or investment-related failure settled by the FSCS is £11,000. As such, the regulator believes the current minimum capital resources requirement of £10,000 is “insufficient”.
A firm holding the current minimum capital resources and a professional indemnity insurance policy with a £5,000 per claim excess, which then experienced two legitimate claims, would have insufficient capital, it noted.
So this should in time help to reduce the burden of firms from FSCS levies. Moreover, the FCA also revealed a commitment to a funding review of the FSCS by the end of 2016, admitting that “there are aspects of the operation of the FSCS that could be impacted”.
3. PI intervention - not yet.
There is an “interface” between advisers’ professional indemnity cover and the capital resources requirements that was considered, as some firms must hold additional capital resources to meet the PII requirement.
The paper states the regulator has previously looked at whether there was potential for “constructive intervention” in the PII market, but that the long lag between advice and many eventual claims meant data on trends is yet be available.
However, while it was deemed too soon to conduct a meaningful review, the consultation did ask for comments on a proposal to extend a restriction on the inclusion in the capital resources calculation of subordinated loans and preference shares redeemable within two years.
4. Most already above minimum.
Under current regulations, the regulatory minimum capital if all firms held the minimum only would be £116m. However, when considered as a sector, firms are currently reporting that they hold £935m in total, according to the FCA.
The new proposal raise this minimum from £116m to £187m, so in aggregate terms the personal investment firm market would not need to raise more capital.
The paper states that there are currently only 100 firms reporting that they hold only the minimum capital resources requirement of £10,000 and 80 of these are earning income of less than £200,000 per annum.
Some 684 firms will need to raise new money under the rule changes, 499 of which are in the sub-£200,000 income category needing to raise between £7,000 and £15,000 in total. The FCA said the fact these firms persevered beyond RDR means most will survive.
5. Timetables.
The rollout would see the minimum transitional requirement of £15,000 imposed six months’ later in June 2016, rather than the proposed December 2015. But the rise to £20,000 will happen six months’ earlier than originally planned in June 2017.
peter.walker@ft.com
