Background and Aims
The FCA has published a Consultation Paper on the capital resources requirements for Personal Investment Firms.
The FCA’s aim remains to require a proportionate level of capital resources for PIFs to absorb routine losses and legitimate redress claims, as well as to provide time to make appropriate arrangements in the case of market exit.
Current Capital Resources Requirements
PIFs with 25 or fewer advisers currently have a flat requirement whereby they must have capital resources of at least £10,000.
PIFs with more than 25 advisers, or that are a network, must have the higher of an expenditure-based requirement (EBR) and £10,000.
The EBR is calculated as four weeks (4/52) of the relevant annual expenditure.
Exceptions to these requirements are dealt with in Annex 4 of the Consultation Paper.
FCA’s Proposals
Capital requirements proposals for ‘B3’ PIFs (i.e. those which are restricted to advising on or arranging retail investment products without holding client money) are the higher of:
- A new minimum capital resources requirement of £20,000; or
- The introduction of a new income based requirement. Under this, PIFs must hold capital resources that are at least equal to a percentage of the relevant annual income. This will be set at 5% for B3 PIFs.
The new requirements will be phased in as follows; £15,000 from 30th June 2016, then £20,000 from 30th June 2017. The requirement to hold 5% (in some cases 10% – see below) of annual income, where higher, also applies from 30th June 2016.
Wherever possible, the FCA proposes to apply the same broad requirements to all categories of PIFs, subject to any minimum requirements that are set by EU law and the interaction with prudential rules in other chapters of the FCA Handbook when conducting non-PIF business.
For PIFs which have permission to trade as principal, hold client money or manage portfolios, the FCA has proposed the new income based requirement be set at a level of 10% of relevant annual income.
The FCA has also proposed a restriction prohibiting the recognition of subordinated loans and preference shares that exceed 400% of a PIF’s capital and reserves (excluding preference share capital) less intangible assets.
Conclusions
PIFs have significant potential to cause damage to a consumer’s finances, either through providing poor advice or by making inadvertent mistakes. The FCA is seeking to ensure that all PIFs hold a proportionate and consistently calculated level of capital resources, to absorb routine losses and redress claims.
The FCA believes the current minimum capital resources requirement of £10,000 is insufficient. An average redress claim for an investment-related failure settled by the Financial Services Compensation Scheme is £11,000. A PIF, holding the current minimum capital resources and a professional indemnity policy with a £5,000 per claim excess, which then experienced two legitimate claims, would have insufficient capital.
The FCA has invited responses to its consultation paper by 7th September 2015, with the aim of publishing the final rules in a policy statement later this year.
