Last week the FCA released its Policy Statement PS15/28: Capital resources requirements for personal investment firms (PIFs) updating rules that set the amount of capital to be held by directly authorised PIFs which date back to 1994. Broadly speaking, PIFs are those firms which provide advice to retail clients, generally without holding client money. Inflation has meant that the capital held by PIFs has halved in real terms and the amendments to the FCA's rules have been long-expected, largely to ensure that PIFs are able to pay redress to customers who complain so that they do not fail and create claims on the FSCS, thereby increasing the FSCS levy.
In June this year we blogged about the FCA's Consultation Paper CP15/17. The Policy Statement sets out some of the feedback to the Consultation Paper. Respondents argued, justifiably, that capital requirements should be higher for firms selling more risky products (particularly NMPIs, which include UCIS) and that allowances should be made for a firm's approach to risk management or for low levels of complaints. In addition, and rather hopefully in our experience, some respondents argued that the current burdens being placed upon advisory firms by complaints liabilities and increasing FSCS levies should be recognised by also considering: the long-awaited review of the 15-year long-stop, changes to PII requirements and the approach to the FSCS. While these are good points, the FCA decided not to make any changes to the rules on which it had consulted because the proposed changes would have been too complex to administer. FAMR is clearly not having the desired effect yet!
The new rules will come into effect from 30 June 2016 and will require PIFs to hold the higher of £20,000 or a variable requirement of 5% of a firm's investment business annual income. The FCA found that out of the 4,000 firms analysed, only 567 which would be subject to the new minimum requirement currently hold lower resources than the new level. This suggests that the new rules will not prove too significant a burden. The FCA confirmed that capital injected into the business to meet the new requirement can be used for business purposes: the FCA has not proposed or implemented a requirement for capital resources to be held in the form of liquid assets.
The timing of this policy statement is striking, given that the FCA's purpose in setting the minimum capital requirement is to ensure that PIFs can pay customers appropriate redress if they complain. At the same time, the FCA published aThematic Review which suggests that 59% of wealth management advice may be unsuitable, i.e. advice about which customers could complain if they suffer losses. It seems that the FCA sees strengthening capital requirements and improving the quality of investment advice as two sides of the same consumer-protection coin.
The FCA still provides a link to an online calculator for firms to get an idea of their capital resource requirements under the new rules.