The majority of IFAs will not be affected by the Capital Requirements Directive (CRD) when it comes into force in January 2007, according to the Financial Services Authority (FSA).
The comment is revealed following publication of the FSA's latest consultation paper - Strengthening Capital Standards 2 - containing its proposals for implementing the CRD following agreement of the directive by the EU Council of Ministers on 11 October 2005.
The CRD was developed in line with the revised Basel framework – which will apply from 1 January 2008 – and re-writes the existing Capital Adequacy Directive (CAD) and Banking Capital Directive (BCD).
Joseph Eyre, press officer at the FSA, claims the vast majority of IFAs will not be affected by the directive because it is mainly concerned with investment firms.
Moreover, although some IFAs will be caught by the CRD if they give “investment advice” as defined by the Markets in Financial Instruments Directive (MiFID), Eyre states those IFAs can be exempted by virtue of MiFID Article 3.
Article 3 creates an optional exemption from MiFID for firms which do not hold client money and Eyre says if IFAs exercise this option they will also be exempt from the CRD.
The consultation paper states: “Where they fall within a MiFID exemption, generally speaking they will not be subject to recast CAD requirements.”
The paper adds even if MiFID Article 3 does not apply, this does not mean a firm is automatically an investment firm for the purposes of the CRD.
Instead, such firms, which the paper expressly says includes investment advisers, may fall outside the CRD definition of investment firm by virtue of Article 3(1)(b)(iii) of the recast CAD and be termed “exempt CAD firms” in the FSA’s Handbook.
The FSA says those firms will be exempt from the risk-based capital requirements and subject to Articles 7 and 8 of the recast CAD instead.
Article 7 introduces flexibility for exempt CAD firms by offering them the option of a capital/professional indemnity insurance (PII) trade-off or a combination of the two, which the FSA says gives equivalent coverage.
Meanwhile, Article 8 requires a firm which is subject to both the Insurance Mediation Directive (IMD) and MiFID to have capital or PII, or a mix of the two. The PII requirement is set at 50% of the MiFID requirements in addition to the IMD requirement, which requires PII of at least 1m euros for each claim and in aggregate 1.5m euros for each claim.
The FSA says the Article 7 and 8 requirements will come into effect from the date MiFID is implemented, which is expected to be 1 November 2007.
Fay Goddard, deputy director general at the Association of Independent Financial Advisers (Aifa), states: "The CRD is not likely to affect the vast majority of IFAs".
She suggests some IFAs might be affected if they are part of a large corporate entity and hold client money, but adds this would depend on the business connection and the issue has not been fully explored yet.
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Emily Perryman on 020 7968 4554 or email [email protected].IFAonline
‘Most significant’ upgrade since launch
Changes happening over coming months
Had accepted British Steel business
Aimed at HNW clients and family groups
Set for 1 April 2019