The latest Financial Conduct Authority capital adequacy proposals could lead to smaller firms closing down, according to one FT Adviser reader.
We read that the FCA’s latest ‘CapAd' proposals would require advisers “to calculate their potential redress liabilities at an early stage, set aside enough capital to meet them and report potential redress liabilities to the FCA”.
The idea is that any firm not holding enough capital will be subject to automatic asset retention rules to prevent them from disposing of their assets.
This is a recipe for disaster for the small to medium-sized adviser. I do not know how long it will take the FCA to understand the advice market it regulates?
This will see smaller firms cease trading, bigger one’s getting bigger on a feeding frenzy and supposedly more resilient, providing consumers with higher cost advice outcomes.
It will not see “a thriving financial advice market to make sure consumers can access the support they need from financially resilient advice firms that want to do the right thing.
The problem is that it is always about the advice and never the product.
Providers or manufacturers of regulated financial products pretty much all rely on intermediated distribution.
The analogous and reflective words of that old music hall song by Billy Bennett, 'She was poor but honest', could well sum up the lot of smaller advisory firms and the relationship they may have with the firms whose products they advise upon and distribute.
"It's the rich what gets the pleasure, it's the poor what gets the blame."
In the scenario this will create, those small firms who have done the right thing for their clients year after year will no longer be able to stand a chance and that is just not fair.
A pointer to this outcome can be found as of summer 2023.
Although the majority of firms were limited liability companies, the second highest group were 9,346 sole traders whose liability is there until they die.
They are highly unlikely to hit the Financial Services Compensation Scheme's inbox as all their assets are on the line.
The average directly-authorised firm has 13 customer facing advisers, the average appointed rep firm has 1.8 customer advisers. They are the most vulnerable.
At midsummer this year, 575 firms joined the register, along with some 10,012 individuals.
But in the same midsummer data, 7,739 firms were de-authorised, seeing 15,206 individuals calling time on a regulated life, it appears.
This surely must send a message to the FCA? The polluter will never pay.
My solution
My simple solution is that all 78,000 regulated firms (yes, everyone including car dealers, funeral plan providers, CMCs etc) pay, say, 3 per cent of annual turnover to the FCA, reinstate the long-stop and stop the Fos and FSCS paying claims that are ’out of time’!
This would eventually be a huge fund, perhaps initially underwritten by the Treasury, just like the FSCS, for a year or two.
