Your IndustryMay 29 2015

Advisers welcome ‘sensible’ FCA capital adequacy plans

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Advisers welcome ‘sensible’ FCA capital adequacy plans

Financial advisers have broadly welcomed the Financial Conduct Authority’s updated proposals to increase the minimum level of capital reserves held across the sector, with one adviser branding the changes “sensible”.

As explained yesterday, most firms will need to hold the greater of £20,000 or 5 per cent of their investment business income. Firms acting as principal or holding client money could have to hold 10 per cent of income.

This replaces the current £10,000 minimum own funds currently required. Firms with more than 25 advisers must at the moment hold the greater of this figure or one month’s expenditure, rising the three months for networks.

The regulator said it hopes a change in the amount of capital firms must hold - and which would be called upon in the event of failure, including related to subsequent claims for redress - will reduce “reliance” on the FSCS, thus stemming recent rises in adviser levies.

The requirements will come into force on a transitional basis in June 2016, following which for a period of 12 months the new minimum capital resources requirement will be £15,000. The lower threshold will then rise to £20,000 from June 2017.

Adrian Murphy, partner at Murphy Wealth, told FTAdviser that previous proposals, placed under review in 2013, which were set to require firms to hold reserves equivalent to three months worth of fixed costs would have been “horrific”.

Mr Murphy said under theses proposals that were due to come into force in December of this year, his business would have had to keep a minimum of £100,000 doing nothing.

“This actually seems quite sensible by comparison, I wouldn’t have thought any decent firm will struggle with these proposals.”

Carl Lamb, director of Norwich-based Almary Green Investments, agreed that the new rules will work in his favour, because like Mr Murphy the original basis meant they had to hold £500,000 as opposed to £200,000. “This approach is to be commended,” he added.

Graeme Mitchell, managing director of Galashiels-based Lowland Financial, added: “I like the sound of tha. Currently I’m battling to get to a figure of 25 per cent of my committed expenditure – currently £200,000 – so £50,000.”

Harry Katz, the recently retired adviser and now consultant for HA7 Consulting, was more scathing, pointing out that unincorporated sole traders might have more of a problem, noting that the £20,000 requirement would probably be the hurdle as many will not earn £400,000.

Yesterday’s consultation paper stated that most personal investment firms with income over £400,000 per annum will generally see their capital resources requirement decrease compared to the existing requirements, because 5 per cent of income would generally be lower than three months of expenditure.

Mr Katz said: “However, if you are incorporated then you will have to have the £20,000 swishing around in the business doing bugger all; even if you invest the money you are in effect having it taxed twice over.

“The unincorporated can have this amount as their own investments earning money for them and on which the might not be taxed at all – as it can be held in Isas – so not incorporating becomes ever more attractive. I was a sole unincorporated IFA for 25 years.”

He added that the bigger firms – which he suggested are often poorly capitalised – will have to pull their socks up or leave. “I see no problem with that, after all if you are earning £1m p.a. why shouldn’t you have £50,000. It isn’t exactly a draconian hurdle rate.”

Chris Hannant, director general of the Association of Professional Financial Advisers, urged the FCA to commit to sensible and proportionate funding requirements, but did not go into any specifics on the consultation’s content.

“We would also like to see greater flexibility for firms about how the funds are held as well as around their use; we will continue to lobby on behalf of our members for the final FCA policy statement on capital resource requirements to include guidance to this effect.”

peter.walker@ft.com