Your IndustryAug 4 2016

FCA shows flexibility but clarification is still needed

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FCA shows flexibility but clarification is still needed

Implementation of the capital adequacy rules had been the subject of much debate and, according to respondents to this survey, the Financial Conduct Authority listened to the industry.

Initially, when the subject of capital adequacy was raised in 2015, the City watchdog had stated the calculation of the new minimum capital adequacy requirement should be expenditure-based.

Previous capital requirements said PIFs with more than 25 advisers, or which are a network, must have the higher of an expenditure-based requirement (EBR) and £10,000.

The original proposal of the EBR was calculated as 13 weeks of the relevant annual expenditure for a network, and four weeks of the relevant annual expenditure for most other PIFs.

One unintended consequence could have been employed advisers converting to self-employed status to gain exemption from the calculations Mike O’Brien

In its May 2015 consultation paper: Capital Resources Requirements for Personal Investment Firms, the FCA had initially proposed the EBR would be revised to 13 weeks as a minimum requirement for a PIF, under a transitional arrangement as follows:

■ Four weeks from 31 December 2015.

■ Eight weeks from 31 December 2016.

■ Thirteen weeks from 31 December 2017.

However, following the consultation, the FCA changed this to an income-based calculation and removed the EBR entirely.

According to Mike O’Brien, group brands director for Tenet, this was a good move.

He says: “The move to an income-based calculation rather than it being expenditure based was a direct result of listening to the industry with regard to the unintended consequences of the latter.

“One unintended consequence could have been employed advisers converting to self-employed status to gain exemption from the calculations.”

Linda Todd, head of Bankhall Operations, says: “The FCA did recognise industry concerns over the original EBR proposals, which could have had a detrimental effect in that PIFs with similar levels of income but different fixed costs could have been subject to different capital resources requirements.

“In this respect, it has been flexible in considering a new approach.”

Some advisers think this is a good compromise.

Caroline Escott, senior policy adviser for the Association of Professional Financial Advisers, says: “We were pleased to hear of the new income-based requirement, which was something we and others in the industry had called for.

“The EBR was disproportionately costly to those firms who manage their staff and advisers on an employed basis.”

Tim Sutcliffe, chief executive for Pi Financial, says: “I think probably 5 per cent of turnover seems to be a sensible figure, and hopefully these changes will ease the pressure on the Financial Services Compensation Scheme.”

However, Jamie Smith-Thompson, managing director of Portafina, comments: “I don’t think the FCA has been flexible in listening to the industry.

“The big concern is the knock-on effect could be a wider advice gap, which is the very thing that needs to be closed.”

Overall benefit

Keith Richards, chief executive of the Personal Finance Society (PFS), says the new requirements should help advisory firms in the long-term.

The principle of holding sufficient capital reserves makes good business sense and will help to better protect a firm from the impact of challenges. Keith Richards

He explains: “The FCA should be given due recognition for delaying the original rule changes following feedback from the sector.

“The PFS was consulted directly and we were able to call on our board member directors and practitioner panel to provide further input to the regulator considerations.

“The subsequent wider consultation following this engagement influenced a change of rules which was more positively received by the profession.”

He adds the the principle of holding sufficient capital reserves makes good business sense and will help to better protect a firm, its clients and staff from the impact of unexpected challenges.

According to Mr Richards: “Few advisers I have spoken with seem to have any concern with the new requirements and acknowledge the FCA has listened.”

Lack of clarity

However, Tenet’s Mr O’Brien and other respondents to this guide believe the final guidance is not yet clear enough and more guidance may be required from the regulator.

Mr O’Brien comments: “There may still be areas where some clarification is required to explain what assets can be counted towards capital in this context, and firms would be well advised to speak to their accountant and obtain any relevant valuations for the purposes of meeting the requirements.

“Of course, this assumes they have not got that amount ready in cash.”