Your Industry  

FCA reveals advice firms struggling with new capital rules

FCA reveals advice firms struggling with new capital rules

More than 100 personal investment firms have told the Financial Conduct Authority they have not met their capital adequacy requirements in the past 12 months.

Data obtained by Financial Adviser under the Freedom of Information Act showed none of these firms had been subject to enforcement action.

Of the 108 firms which had not met their capital adequacy requirements in the past 12 months, the FCA said 11 were in the process of cancelling their permissions.

Article continues after advert

The FCA stated it could not identify the firms which had not met the requirement.

At the end of last June, the full capital adequacy requirement came into effect as financial advisers transitioned into the new regime.

Since 30 June it has been a regulatory requirement that firms need to hold the higher of £20,000 or 5 per cent of their investment business income in order to meet capital adequacy rules.

For the year before that, the FCA has been implementing a transitional requirement of £15,000.

Before the FCA took action to raise the limit, the capital adequacy requirement was £10,000 for firms with 25 advisers or less and the greater of £10,000 or an expenditure-based requirement for those with more than 25 advisers.

The regulator said it hopes a change in the amount of capital firms must hold - and which would be called upon in the event of failure, including related to subsequent claims for redress - will reduce “reliance” on the FSCS, thus stemming recent rises in adviser levies.

The FCA said it could not provide information on what proportion of the sector had met the new permanent requirement since firms had not reported their capital figures from the end of June 2017.

But it revealed that in the first five months of the year 44 firms said they had not met their capital adequacy requirements, of the 5,000 personal investment firms the FCA regulates.

An FCA spokesperson said: “Please note however, that some of these firms will not necessarily be reporting on only the PIF transitional capital adequacy rules; they may have other permissions which require a higher level of capital adequacy.”

A firm's capital buffer must be made up of the right type of allowable assets, eliminating most non-liquid assets such as the firm’s business premises or intangible assets such as goodwill.

It must be readily realisable, meaning it can be turned into cash within 90 days.

Meanwhile £20,000 is the minimum which must be maintained at all times, not just the date when firms draw up their balance sheet for regulatory reporting.

Tenet’s group risk and regulatory director, Caroline Bradley, said: “Small firms need to look beyond the basic £20,000 and understand what this really means for their balance sheet.

“For example, events such as professional indemnity insurance renewal terms can trigger additional capital resource requirements.

“The requirement to set aside the greater of £20,000 or 5 per cent of investment turnover may also be a challenge for firms with ambitions to grow via consolidation.”