Do the new prudential rules really help advisers?

According to the FSA, the new prudential rules for personal investment firms (PIFs) have been created “for the benefit of advisers, not to make things more difficult for them”.

However, if the regulator hopes for a pat on the back from advisers, they are heading for a rude wake-up call.

Advisers argue the new rules will damage the industry at a time when they are struggling to keep their businesses afloat during a protracted recession.

David Golder, managing director of Bankhall, goes so far as to say: “If the FSA really wanted to kill off the adviser community, it would struggle to come up with something better than this.”

The response to the new rules also calls into question the FSA’s consultation methods which appear to create more confusion and bad feeling than a consensus, as we have seen with the RDR proposals too.

As we reported last week, even key stakeholders were convinced the FSA intended to drop its plans to force firms to hold three months’ worth of fixed costs as part of their capital requirements.

The fact they were seemingly left out of the loop also calls into question which players in the industry are exerting the greatest influence over the regulator.

However, the FSA has listened to calls on the timetable to implement the new rules which has now been extended by a year to 2013.

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. 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.

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 or 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.

However, as with many other FSA consultation papers which aim to make things simpler for advisers, issues remain about implementation.

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 (for example, some advisers are paid a salary and others commission while some firms outsource compliance and others do not) mean it will be difficult for the regulator to determine what constitutes a “fixed” expenditure.

The regulator has said it will consult on the definition next year, but again it has created more problems than it has solved. Once again advisers will have to try and construct a business model for the coming years without having all the requirements set in stone.

Katrina Baugh, editor, Professional Adviser and IFAonline