Various steps can be put in place now to prepare

However it is not too late to get started if a firm has not been able to divert attention away from the daily managing of clients to getting ready for the incoming capital adequacy regime.

Caroline Escott, senior policy adviser for the Association of Professional Financial Advisers, says: “Those firms who have not started to build up capital reserves already should take advantage of what seems to be a historically busy time for advisers.

“They should make the most of the transition period and start now by aiming to set aside at least as much capital as the new rules require.”

Continue to lobby

According to Keith Richards, chief executive of the Personal Finance Society (PFS), the regulator should bear some responsibility in making advice work for all.

He says: “The Financial Conduct Authority (FCA) and government must consider the ongoing challenges facing the intermediary market in order to help improve consumer access at a time when the need for sound advice is greater than ever before.

“By implementing prudent reform, they will also help avoid a push towards non-regulated models and activities, which may result in poor consumer outcomes.

“Key to all of this is building on the input and recommendations of the Financial Advice Market Review, and ensuring the regulatory environment promotes consumer choice and access to reliable financial advice.”

Stewardship

Mike O’Brien, group brands director for Tenet, comments: “Firms should put in place prudent stewardship now, to ensure the business operates on a proper footing.”

Planning ahead is vital, says Tim Sutcliffe, chief executive of Pi Financial: “Advisers should plan a cash flow and stop living hand-to-mouth.”

In agreement with this is Jamie Smith-Thompson, managing director of Portafina, who explains: “The main thing is to plan as far ahead as possible, with the expectation the rules aren’t going to change.

“That way, they are well-prepared for the worst-case scenario. Anyone who doesn’t prepare in advance, in the hope things will change, could find themselves in a very difficult position.”

Several of our members told us they had the new capital requirements in place well before the FCA published the new rules Caroline Escott

Mr Richards emphasises this point: “Advisers have had a few years to make provision for the increase in capital adequacy requirements and the majority have had this in place for some time.

“Indeed many recognise it as a minimum level and often carry higher amounts to protect against short-term cash flow challenges.”

However, according to Ms Escott, the majority of firms seem to be ready. She says: “Most of the advisers I have spoken to about this seem well-prepared for the new rules on capital adequacy.

“Several of our members told us they had the new capital requirements in place well before the FCA published the new rules.

“Furthermore, an increase in the minimum threshold had been on the cards a long time, so most firms should have had time to build up their capital reserves.”

Check your PI cover

Mr Richards also encourages advisers to check the provisions of their professional indemnity insurance.

He says: “The PFS has been urging its members to pay particular attention to the quality of their cover and not be overly influenced by price alone, as the price of cover can be influenced by increased excess amounts or exclusions.

“Where there are exclusions, firms should take other steps to protect themselves from potential future losses arising from unexpected claims as they would have to bear the full compensation cost.”

Tools and testing

Apart from the FCA’s Capital Resources Requirements Policy Statement, which contains useful information and explanatory notes in the annex, the City watchdog has also provided an online ‘calculator’ to help senior executives work out their firm’s expected capital adequacy buffer.

This can be found on the FCA’s website.

Similarly, using stress-tests can help advisory firms, says Linda Todd, head of Bankhall Operations. She explains: “This could be useful to use annually to understand the effect of various areas, such as market risk, investment risk and liquidity risk.

“This would test to see if you not only hold sufficient for current minimum needs but also have access to capital to provide a buffer based on market events, impacts of complaints and staff issues, to name a few.

“This would help avoid the potential of having insufficient capital.”