The FCA will require all personal investment firms (PIFs), which are those that provide advice to retail consumers on investment products, to hold £20,000 ($30,000, €27,500) of capital or a variable requirement of 5% of a firm’s investment business annual income.
This replaces the planned £10,000 minimum, which was due to become the requirement on 31 December 2015 under rules originally made by the FCA’s predecessor, the Financial Services Authority (FSA).
Current rules outdated
“The current minimum capital resources requirement (£10,000) has almost halved in real terms since it was set in 1994. As a result, it would now be insufficient to meet just one average pension or investment claim following unsuitable advice,” the regulator said in a statement.
The FCA said that it estimated there were approximately 5,000 directly authorised PIFs in the UK, providing both restricted and independent advice, and 9,000 appointed representative firms.
"The current minimum capital resources requirement (£10,000) has almost halved in real terms since it was set in 1994."
“Our rule changes relate only to directly authorised PIFs,” it said.
The FCA has also made provision for a staged introduction of the new capital resource requirement for smaller affected firms by increasing the minimum level from the current £10,000 to £15,000 from 30 June 2016, before reaching the full required £20,000 by 30 June 2017.
“This gives firms time to secure any necessary additional financial resources,” it said. The FCA’s own analysis found that that, of 4,000 firms analysed, 587 subject to the new minimum requirement currently hold lower resources than the new level.
Investment business key
Explaining the reasoning behind the 5% of investment business rule for bigger firms, the FCA said the current rules for larger PIFs (with over 25 advisers) used a fixed expenditure-based requirement (EBR), which meant that PIFs with similar incomes could have a very different requirement depending on their business model.
It noted this meant that PIFs with self-employed advisers would have lower relative fixed costs than those with salaried advisers, resulting in a lower requirement.
“Use of an EBR can disincentivise firms from investing in their business or taking on employed advisers, as it leads to a capital resources requirement before such investment has had time to generate a return.
“Investment business income is a more suitable way to address the capital resources requirement across different business models, providing a better proxy for the scale of risk that an individual PIF poses in terms of potential harm to consumers and market disruption.
“We propose that 5% of annual income is proportionate for PIFs, where this figure is higher than the minimum of £20,000,” it said.
The FCA said the new rules were designed to advance its objectives to secure an appropriate degree of consumer protection, enhance market integrity and promote effective competition.
