Directly authorised advisers recommending pension planning, investment products, income and estate protection will see their capital adequacy requirements soar under rules proposed by the FCA today (8 December).
The City watchdog stated there are about 5,000 directly authorised firms in the “Personal Investment Firms” sector and 9,000 appointed representative firms currently providing both restricted and independent advice.
The current capital resources rules for such firms date back to 1994, and were due to be replaced on 31 December 2015 by the rules originally made by the Financial Services Authority (FSA).
However, the FCA has now decided to further overhaul capital adequacy rules for directly authorised advisers - and double how much cash these intermediaries must set aside.
Both the existing and previous rules proposed by the FSA used a PIF’s fixed expenditure to set the variable capital requirement, albeit the existing rules differentiate based on the number of advisers in the firm.
That differentiation means that more than 90 per cent of investment advisers are currently required to hold only the minimum £10,000 of capital resources, regardless of their income.
Today the FCA ruled that although most investment advisers do not hold client money, they can cause damage to consumers’ finances either by providing poor advice or by making an inadvertent mistake.
As a result, the regulator is suggesting a proportionate staged introduction for smaller firms by increasing the minimum capital resources requirement (from the current £10,000) to £15,000 from 30 June 2016, before reaching the required £20,000 from 30 June 2017.
The FCA stated: “The current minimum capital resources requirement (£10,000) has almost halved in real terms since it was set in 1994.
“As a result, it would now be insufficient to meet just one average pension or investment claim following unsuitable advice.
“We do not want compliant PIFs to fail unexpectedly under normal operating conditions, resulting in claims on the Financial Services Compensation Scheme (FSCS), which would then need to be funded by other firms in the sector.”
The current rules for larger investment advisers (with more than 25 advisers) and the FSA’s deferred rules for all PIFs include a fixed expenditure-based requirement (EBR).
This means PIFs with similar incomes could have a very different requirement depending on their business model.
For example, PIFs with self-employed advisers have lower relative fixed costs than those with salaried advisers, resulting in a lower requirement.
But the FCA has now decided the use of an EBR can disincentivise firms from investing in their business or taking on employed advisers, as it leads to a capital resources requirement before such investment has had time to generate a return.
The regulator proposes that 5 per cent of annual income is proportionate for PIFs, where this figure is greater than the minimum of £20,000.
The FCA stated: “Investment business income is a more suitable way to address the capital resources requirement across different business models, providing a better proxy for the scale of risk that an individual PIF poses in terms of potential harm to consumers and market disruption.”
emma.hughes@ft.com
