PIFs must hold three months' worth of fixed costs - FSA

All personal investment firms (PIFs) will have to hold capital resources worth three months of their annual fixed expenditure (the EBR), the FSA confirmed today.

Key stakeholders had been told the regulator would loosen its rules on the EBR, dropping the three months requirement and putting in place more lenient guidelines. But the regulator has opted to stick with its original proposals.

All firms will be required to hold the fixed costs in "realisable assets" such as cash. The minimum capital resources threshold for any firm has been set at £20,000.

The regulator says, following feedback from the industry, the transition to the new regime has been extended by a year to 31 December 2013, allowing firms more time to comply with the requirements. Firms will also be able to take into account any changes arising from the RDR.

Under the new regime, firms will have to hold capital worth a month of their annual expenditure by 31 December 2011. This will increase to two months in 2012 and three months by 31 December 2013.

The regulator says it considers the expenditure-based requirement as the best method to reflect operational risk in a PIF.

It adds requiring PIFs to hold more capital resources will enable firms to provide redress for consumers and limit the compensation due from the Financial Services Compensation Scheme (FSCS) in the event that they are wound up.

Paul Sharma, FSA director of prudential policy, says: "One of the lessons learned from the current crisis is that firms need to hold enough capital resources in order to weather future financial storms.

"Having a clear, consistent regime for all personal investment firms will provide better protection for consumers and the industry from the fall-out when firms fail.

"We have listened to the industry and are phasing in the new regime to allow time for them to adapt to the changes. However, we expect firms to start considering now what resources they will need to have in place."

Critics of the proposals say they punish firms that invest in proper back-office and compliance systems while having little bearing on those firms that do not.

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 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."