FSA must get fixed cost definition ‘bang on’ – AIFA

The Association of IFAs (AIFA) says it is “absolutely vital” the FSA devises a fair method for firms calculating their Expenditure Based Requirement (EBR).

It argues variations in business model - some advisers are paid a salary, others commission - and methods - some firms outsource compliance, others do not - mean it will be difficult for the regulator to determine what constitutes a 'fixed' expenditure.

In today's Review of the prudential rules for Personal Investment Firms (PIFs), the regulator said all firms will have to hold capital resources worth three months of their annual fixed expenditure.

But it points out it "did not intend" to create different capital resources requirements for firms with different business models and of different sizes.

The report reads: "We will consider how we can apply a consistent approach to the EBR to all firms so that it will deliver a level outcome irrespective of the firm's business model." It says it will consult on this issue next year.

AIFA director general Chris Cummings says: "We need to know what constitutes a fixed expenditure and what doesn't.

"It is absolutely vital the FSA gets this definition bang on. If it doesn't, there could be all sorts of unintended consequences."

The FSA says it considers the EBR as the best method to reflect operational risk in a PIF.

Some respondents to the initial consultation on prudential rules, back in 2007, said the FSA should consider a risk-based approach to determining how much capital firms should be required to hold.

"We did not dismiss the idea completely," an FSA spokesperson says. "We consulted on risk-based assessments but we could find no definitive risk-based indicators. It is very difficult to assess what would be suitable."

She added: "We have done this [prudential rules] for the benefit of advisers, not to make things more difficult for them. There will be widespread benefits to the industry as a whole, which will also help to limit the cost to the FSCS of firms being wound up."