The change of direction on the implementation of the new capital adequacy rules for investment firms has been a long time coming. The Small Business Practitioner Panel and trade associations voiced arguments against the new rules, and in particular their interaction with the objectives of RDR, consistently since the changes were conceived more than five years ago.
The rules have been in force for a long time but most firms failed to grasp the implications until they crunched the numbers ready for the implementation date at the end of the year.
The previous capital adequacy threshold had sat at £10,000 for 20 years. Research indicated that the smallest firms which would need to increase their reserves to £20,000 already held that higher level of capital. Therefore the rule change would, for them, have a minimal impact.
However for larger firms the introduction of the ‘expenditure-based requirement’ would be punitive. In association with predicted reductions in business cash flow post-RDR, the enforced reserving of significantly higher levels of capital was not only ill-judged, but also ill-timed.
Furthermore, in the regulator’s mind if nowhere else, RDR was about removing commission bias, moving away from ‘sales’ towards ‘professional advice’. It was therefore predictable that firms, especially the larger ones, moving to more professional, fee-based and long-term client relationships could be expected to use more administrators and paraplanners, appoint graduate trainees and likely to introduce salaried roles for their more highly-qualified, increasingly chartered and certified financial advisers and planners.
Concerted arguments from all adviser representatives that the change was not only inappropriate but actually totally counterproductive were ignored.
Until last week.
The regulator should be congratulated for finally listening to, and acting on, the representations of trade bodies and firms, not lambasted for changing its mind.
Patient explanation of the practical implications of the rules to FCA staff on placement in IFA firms and referral of the matter to a FCA consultant with a sharper grasp of how businesses work all played their part in persuading the regulator to reconsider their position.
But now we have the FCA’s attention we must propose an alternative system. We must address its concerns about the impact of inadequate capital on consumers should firms get into difficulties, while addressing the concerns of prudent businesses which also want to invest in the growth and development of professional advice firms that we should all want to flourish.