Advisory firms are fast approaching the deadline to meet new minimum capital rules. Are they prepared? Carmen Reichman finds out.
At first sight, the incoming capital resources rules don’t look dissimilar to the existing requirements: by the end of this year, firms must hold at least £15,000 in spare capital (rising to a minimum of £20,000 by 2016) against a current floor of £10,000.
But the devil, as usual, is in the detail.
The Association of Professional Financial Advisers (APFA), which is attempting to raise awareness of the implications of the changes, said it is important firms don’t transfix on the £20,000 figure because, in some cases, they may need to look far, far beyond it.
Are you prepared for the new capital adequacy rules?
As APFA points out, the regulator is not necessarily asking for a straightforward sum, but instead a potentially fluctuating figure based on firms’ ‘fixed’ expenditure. This is the creatively-named Expenditure Based Requirement (EBR).
“The important thing is that people don’t just assume it’s about £20,000,” said APFA director-general Chris Hannant. “Because it really is an either or.”
Indeed, the regulator wants firms to hold “whichever is the greater”; depending on their size and resources, firms must either hold a fixed sum (£20,000 from January 2016) or an amount equal to their fixed expenditure over a three month period (the EBR).
What defines a ‘fixed’ cost has been the subject of debate in the industry ever since the regulator – then the Financial Services Authority – finalised the rules in 2010.
As APFA points out, that debate continues, but we know it incorporates salaries, office expenses including rent and professional indemnity insurance excesses.
On the up
The regulator’s rationale for raising the £10,000 minimum requirement – in place since 1994 – is that firms will be better able to meet the potential costs of claims against them without going out of business, when such costs would pass to the Financial Services Compensation Scheme and, shortly afterwards, to the remainder of the industry.
But, for many firms, the EBR could result in principals or owners having to find £60,000 or more. Firms will have to hold the amount in cash or in assets that are quickly convertible into cash.
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