FSA set to loosen capital requirements rules

The FSA is likely to bow to stakeholder pressure by dropping plans to force firms to hold three months' worth of fixed costs as part of its capital requirements for investment advisers, Professional Adviser understands.

In a reworking of its Review of the Prudential Rules for Personal Investment Firms, the regulator will also give principals an extra year - to the end of 2013 - to implement the requirements.

In its November 2008 consultation paper, the FSA proposed extending the Expenditure Based Requirement (EBR) to all firms based on three months of annual fixed expenditure and raising the minimum capital resources level from £10,000 to £20,000 for all firms.

The FSA stopped collecting feedback in March and will publish a policy statement before the end of the year.

Critics say the EBR element of the proposals, dubbed a "tax on good practice", actively works against firms that invest in back-office infrastructure and compliance, while leaving the more transactional businesses relatively unscathed.

They add the timing of the proposals - in the midst of a credit crunch - will do more to force firms out of the industry than the RDR, which the FSA describes as a "separate but parallel project".

David Golder, managing director of Bankhall, which last month completed a merger with network giant Sesame, says he "struggles to see the rationale" behind the FSA's current EBR solution.

"It seems to me the FSA sees the advice community as under-capitalised and, by and large, that is the case," he says. "But the answer is not to tie-up capital in a place businesses can't access it.

"Firms should be allowed to accumulate capital and I am not quite sure what these proposals will achieve. If the FSA really wanted to kill off the adviser community, it would struggle to come up with something better than this."

Since 2006, all PIFs have been subject to an ‘own funds' requirement of £10,000 while networks, or firms with 26 or more advisers, have been subject to an EBR of either four or 13 weeks ‘relevant' annual expenditure.

In its November 2008 paper, the FSA said the rules were "very complicated and confusing" and felt subjecting all PIFs to the same prudential treatment would clarify the situation.

It added by setting firms' capital resources requirements at an appropriate level, it aimed to "reduce the market failures that lead to FSCS levy payer detriment". Deadline for implementation was due to be the end of 2012.

Chris Cummings, director general of the Association of IFAs (AIFA), says the proposals in their current guise are "iniquitous and unfair".

"It is perverse that a regulator should be insisting IFA firms hold more capital in the midst of a recession they did not cause but have certainly been the victims of," he says. "We would like the FSA to extend the timescale for implementation and better define the EBR."

The FSA would not comment other than to confirm it would be publishing its policy statement before the end of the year.