FSA plans requiring IFAs to hold capital of at least three months of their annual fixed expenditure risk the sustainability of the sector, warns the Association of Independent Financial Advisers (AIFA).
Responding to the regulator's decision to go ahead with its Expenditure Based Requirement (EBR) Prudential proposals, AIFA says the plans fail to meet the stated aim of providing ongoing support for consumers when a firm is wound up, but not burdening remaining firms.
The plans call on all IFAs to hold a minimum £20,000 buffer by the end of 2013.
Andrew Strange, director of policy at AIFA, says: "The current proposals will see the capital requirements for all firms increase. There is a clear risk that this may result in a less sustainable sector, running counter to FSA's original objectives. The increase in capital required is unrealistic within the timescale set."
"The FSA must realise the effects these proposals will have on the profession and reconsider them as a matter of urgency."
He welcomes the FSA's decision to accept the AIFA lobby and extend the deadline for implementing changes to 2013, but says the Association is still "far from happy with FSA's conclusions".
"Proposed regulatory changes cannot benefit consumers if they only serve to reduce the number of financially stable and viable firms in the sector from today's level," he says.
AIFA is concerned advisers have so far failed to grasp the wider implications of the FSA's wish to consult next year on the application ‘of a consistent approach to the Expenditure Based Requirements to all firms...irrespective of the firm's business model'.
"The Policy Statement does not elaborate further on this, but FSA must ensure there is fair and responsible treatment of Appointed Representatives or self-employed advisers. This is a significant issue raised by the profession. As an example, the levelling up of the EBR requirements for these fundamentally variable costs would be deeply inappropriate," he adds.
Amanda Davidson, AIFA deputy chairman, says: "AIFA has conducted significant work over the past months to deliver both an extension to the implementation date and demonstrate to the FSA that further consultation on EBR is necessary to avoid clear detriment to firms and the clients they serve.
"Any firm not in AIFA membership and thus supporting our efforts should consider carefully the cost of additional capital the FSA will force them to hold.
AIFA is forming a working group to consider solutions in advance of next year's consultation.
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