30Sep

Trade association the Association of Professional Financial Advisers (APFA) is calling for more time for medium-sized financial advisory firms to adjust to what could be significant increases in the amount of capital they need to hold.

Current rules on capital adequacy require firms with up to 25 advisers to hold capital of £10,000. Those with 25 or more advisers must hold the higher of four weeks expenditure or £10,000, while networks (firms with five or more Appointed Representatives) must hold capital equivalent to 13 weeks expenditure.

The new proposals would see the over-riding minimum amount increase to £15,000 from June 30 2016, and to £20,000 from July 31 2017. All firms would also be subject to a new income-based requirement, where they would need to hold 5% of annual income from investment activities if this was higher than the applicable minimum level.

The Financial Conduct Authority (FCA) believes the change is justified on the grounds that the average compensation claim made via the Financial Services Compensation Scheme is now £11,000. The FCA estimates that 684 of every 4,000 firms will experience some form of increase in their capital resources requirement.

The Association has estimated that a firm with between 10 and 25 advisers that can currently get away with holding the minimum of £10,000 could need to hold as much as £100,000 under the new system. One firm has claimed their own requirement will increase by a factor of 20, to £200,000.

APFA has commented on the potential for large increases for medium-sized firms in its response to the FCA’s consultation on the subject, and has called for the regulator to soften the blow by introducing the income-based requirement at 3% for the period commencing June 30 2016, and only increasing it to 5% from July 31 2017.

APFA director general Chris Hannant said:

“Overall, we feel the proposals are sensible. But mid-sized firms will feel the biggest increase and it does not seem right that those with the furthest to go are only given a year to get there.”

Some firms appear resigned to the changes. Tim Page, director of Suffolk-based advisory firm Page Russell, said:

“There is always going to be one sector that is hardest hit, but medium-sized firms would have been even more adversely impacted under the old proposed rules. The cap ad rules have been going round for years and we have finally got to a reasonable outcome so we should just get on with it.”

Whatever the outcome of APFA’s pleadings though, advisory firms need to prepare themselves for some significant changes in this area. The changes are currently scheduled to come into force on June 30 2016, having already been delayed three times.

The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article.