IFAs could be worst affected by requirements to implement the Capital Requirements Directive because of the impact it will have on calculating capital.
Developed from the Basle II directive, the latest proposals for CRD are designed to secure capital requirements on larger institutions, however, the FSA acknowledges this current plans also require financial advisers to substantially increase the capital they hold to meet adequacy requirements.
“The CRD does not make particular provisions discriminating for or against smaller firms or investment firms,” says the FSA in its Feedback Statement FS05/1 to Consultation Paper <05/3 entitled Strengthening Capital Standards.
“But we recognise that, in practice, particular implementation challenges may arise for smaller investment firms.”
The FSA says it is speaking to smaller firms to understand fully the issues they may be facing in implementing the CRD.
A particular challenge for IFAs, says the FSA, is the tend to have small compliance departments or an accountant who works on a part-time basis and which makes the challenge of calculating their capital greater.
The FSA says regulations which result in big changes to a business model are bound to create larger challenges for smaller firms.
Helen Banks, spokeswoman at The Association of Private Client Investment Managers and Stockbrokers (APCIMS), adds the biggest challenge is working out how the CRD affects small firms from the “maze of material” the FSA has produced.
Banks says the CRD creates difficulties because it stems from the Basel Framework which was not intended for investment firms.
There is also uncertainty as to how the CRD interacts with the Markets in Financial Instruments Directive (MiFID), which will replace the Investment Services Directive when it comes into effect in April 2007.
Banks says IFAs need to work out whether they are covered by MiFID because if they are, they should also be covered by the CRD.
Both directives contain requirements on systems and controls and firms need to “try and link them in,” says Banks.
The FSA says it plans to consult on the implementation of MiFID by December this year but will not know how it interacts with the CRD until the text of MiFID is finalised.
Another challenge for IFAs is they must comply with the Internal Capacity Adequacy Assessment Process (ICAAP). This is in addition to the requirement in the Insurance Mediation Directive which says firms must have professional indemnity insurance to a level of £1m.
The FSA says it will provide more information on ICAAP in its second consultation paper in February 2006 and it is “engaging with several small firms and trade bodies as we develop our supervisory approach to reviewing firms’ ICAAPs”.
The FSA advises IFAs to read the Feedback Statement and to consult with trade bodies if they have any issues.
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
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