Capital adequacy rules ‘punish' pro-RDR firms - IFP

The FSA's proposed capital adequacy regime punishes firms which are attempting to move towards the post-RDR business model, according to the Institute of Financial Planning (IFP).

In a response to the regulator's consultation on the proposals to increase capital requirements for personal investment firms (PIFs), the professional body has urged the FSA to consider a regulatory dividend for firms investing in making their business RDR compliant.

"The current proposals potentially penalise those firms who have invested, and those that continue to invest in changing their business models to a more sustainable, consumer friendly model," the IFP says.

Adviser firms that move away from upfront commissions, engage with the TCF initiative, resource proper research capabilities and added infrastructure supports may be inadvertently disadvantaged by the proposals, claims the IFP.

It gives an example of an adviser firm, Firm A, with a £500,000 turnover, split between 6 advisers and employing a single administrator. If the advisers work on a commission only basis, receiving 80% of what they sell and with minimal trail commission income of £72,000, their capital adequacy requirements will only increase from £15,000 to £20,000.

By comparison, Firm B with the same turnover employs two financial planners, two paraplanners and two admin staff. They also employ an external compliance firm and make £300,000 of their income from ongoing fees and trail commissions.

However, Firm B would need capital of £75,000 under the new regime, £65,000 more than they do today.

The IFP says Firm B's business model poses less risk than Firm A's, yet firm B will find it more difficult to meet the requirements.

"At the moment there is no regulatory dividend for those that have invested in their businesses and created a more professional environment," the IFP adds.

"This has to be addressed by the FSA otherwise it will force firms to backtrack on positive transition."

Contact: John Bakie, Tel: 020 7484 9805, e-mail: John.Bakie@incisivemedia.com