Financial advisers have raised concerns around the Financial Conduct Authority’s proposal to increase the capital adequacy requirement for firms, with some arguing it could push smaller firms out.
In its business plan this month (July 15), the FCA said it was reviewing the capital adequacy requirements on firms as part of its review of the compensation policy framework.
It wants firms that fail to have appropriate capital, liquidity and reserves to cover outstanding redress liabilities and to hold financial resources “proportionate to the potential harm caused”.
Details of the review are to be published during the next 12 months but the regulator said it believes this will help reduce the level of Financial Services Compensation Scheme payouts and the levy.
But some advisers have concerns higher capital adequacy won't solve the problem and will instead push smaller firms out of the market altogether as they won't be able to afford to cover all their potential liabilities.
Darren Cooke, chartered financial planner at Red Circle Financial Planning, said: “Increasing capital adequacy won't solve the problem, all that stands to mean is that I will not pay as much on my FCA levy but I will have to keep huge amounts more cash in my business.
“No firm can truly afford to cover all their potential harm no matter how high you make the barrier so claims will still fall to the FSCS and you risk taking smaller firms out of the market altogether.”
Tim Morris, an adviser at Russell & Co Financial Advisers, said any costs should remain "reasonable" and in line with current requirements.
"It’s like anything, if you set that bar too high it will put firms out of business. You only need to look at the high street where business rates are unaffordable to most small independent businesses.
"They need to ensure advisers do not go the same way. If people wanted to move fully online for financial advice, they would be doing so right now. In my experience, that is not currently the case for most."
Meanwhile, others argued it was too early to tell what the impact on smaller firms would be.
Alasdair Walker, chartered financial planner and managing director at Handford Aitkenhead & Walker said: "I think the devil will be in the detail. I suspect higher capital adequacy requirements may well crowd out smaller firms, but I think liabilities will scale with firm size, and so without professional indemnity insurance being an important part of the discussion, it’s a non-starter."
Ricky Chan, director at IFS Wealth & Pensions, said smaller firms transacting higher risk business had the potential to do more harm than larger ones and this should be reflected.
But he did not think raising capital adequacy requirements was the answer to the industry's woes.
He said: “In theory, larger capital adequacy reserves should help somewhat as more capital is available to cover PII excess when there are multiple claims.