In an interview with FTAdviser, Steve Young, Sense commercial director, warned that the new capital adequacy rules would mean a “significant increase” in the amount of capital that advisers, “especially medium-sized” advisers, will have to keep in the bank to satisfy the regulator.
He said: “I think the FSA will need to think this one through carefully, but I think there will be a move away from salaried advisers to variable pay because, of course, having a salary counts towards your expenditure which determines how much capital you need to hold.”
Mr Young believes that the capital adequacy increases will drive consolidation within the market.
He said: “Some people will join a network as they can provide a shelter to capital adequacy because you don’t need your capital adequacy if you are part of a network. Some people will join together as it makes sense too.”
Mr Young believes that there will be more networks joining together post-RDR and although he dismisses the notion of another large failure, he believes there will be “interesting times” for provider-owned large networks.
He said: “My guess will be that we probably won’t see a big network failure as there are insurers backing them but there is another issue that sits within that.
“If you are owned by a provider and you are losing money as a network, it’s a breach of the adviser charging rules if the provider is putting money into the networks as that is not allowed.
“So a network owned by a provider but [that] is losing money will either have to cut its costs or increase its charges.
“Providers can’t offset it as it is a breach of the rules – they can’t put money into the distributor, otherwise the argument would be that you can have an advantage by charging less to your consumers in adviser charging.”
