FCA removes fixed costs from adviser reserve calculation

FCA removes fixed costs from adviser reserve calculation

The regulator has finally launched a long-delayed consultation on capital resource requirements for financial advisers, proposing to double the minimum amount businesses must hold and scrap the fixed cost basis for larger firms.

Changes to the current capital resources rules would replace those made by the Financial Services Authority, which were delayed again in 2013 having been scheduled to come into force in December of this year.

The proposals include a new minimum capital resources requirement of £20,000, replacing the £10,000 minimum own funds currently required.

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A new income-based requirement would for the majority of firms be 5 per cent of the annual investment business income earned in the previous year. Firms will need to hold the greater of the two figures in case they face funding difficulties or need to be wound down.

The requirements will come into force on a transitional basis in June 2016, for a period of 12 months following which the new minimum capital resources requirement will be £15,000. The lower threshold will rise to £20,000 from 31 June 2017.

This is effectively an acceleration of the previous timetable, which proposed the £15,000 minimum from December this year and the increase to £20,000 by the end of 2017.

Under current rules, advisers must hold £10,000 in reserve. Those with more than 25 advisers must hold the greater of this figure, or one month’s worth of fixed costs.

FTAdviser previously reported that the new rules were expected early this year, confirming how much advisers will have to need to hold stay in business, after a four-year delay.

The two phase increase was proposed two years ago, but delayed amid doubts over whether it was right solution in wake of RDR, with the FCA stating it was not sure the approach in principle “remains the most appropriate” or is “consistent” with its competition objective.

The new statement read that following feedback, implementation was deferred pending further review, which is now being undertaken with this consultation paper.

“As before, the aim remains to require a proportionate level of capital resources for PIFs to absorb routine losses and legitimate redress claims against them, as well as to provide time to make appropriate arrangements in the case of market exit.”

The regulator has requested responses using an online response form by 7 September.