The FSA is looking to increase the assets intermediary firms will need to back their businesses, wri...
The FSA is looking to increase the assets intermediary firms will need to back their businesses, writes Robert Stock.
This will apply to those firms with annual audited investment income above £200,000.
In consultation paper 97 on the rules for the FSA's Integrated Prudential Sourcebook (PSB), due to come into force during 2004, the FSA proposes that capital backing for firms will be the higher of £10,000 or 5% of annual audited investment income calculated over the previous three years.
That means that intermediaries with an annual audited investment income of greater than £200,000 will see their base capital requirement jump to more than £10,000.
The proposed base capital requirement would apply for firms designated PRU 5, the equivalent of the current PIA B3, which give investment advice, but do not hold client assets.
Annual audited income is defined as the amount of total income in the firm's audited financial statements. This is calculated less the profit on the sale or termination of an operation; less the profit arising from a fundamental re-organisation or restructuring which affects the nature and focus of the firm's operation; and less the profits on the disposal of fixed assets, including investments held in a long-term portfolio.
Under the old PIA rules, the base capital requirement is £10,000 but there is a difference in the way adviser firms can hold the assets. Partnerships and sole traders are allowed to hold the base capital requirement in a variety of non-liquid forms such as property, whereas limited companies must hold it in liquid or near liquid assets.
The base capital requirement is designed to allow an adviser to be closed in an orderly manner if it suddenly ceases to trade.
Consultation Paper 97, a 468 page document released on 6 June to the financial services industry, has yet to be studied by the asset management, life assurance and intermediary community. It concerns the requirement for authorised firms to have adequate financial resources and appropriate systems and controls. Much of it is based on EC directives and other international standards, many of which are being revised and could result in changes to the PSB when the international work concludes.
The PSB sets requirements for each of the main risks that could cause a firm major loss or insolvency: credit risk; market risk; operational risk; insurance risk; liquidity risk; and group risk Ã± the risk from membership of a group of firms.
In drafting the proposals on consultation paper 97 the FSA said it sought to avoid creating huge barriers to entry by keeping initial and continuing minimum capital resources requirements to the minimum required by EC directives and matching the requirements to the nature and size of businesses.
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