Non-MiFID adviser firm? Look out for an increase in capital requirement.

If you’re a non-MiFID retail firm, it looks like you will need to hold more capital sooner rather than later...

The recently published update on the Consumer Investment Strategy contains a few nuggets for regulated firms. The following quote on prudential requirements in particular caught my eye:

“Investigating changes to prudential requirements for non-MiFID adviser firms: We have continued our work to review the prudential regime for non-MIFID investment advisers. This work aims to ensure that firms that create redress liabilities are better able to pay them. In doing so we are seeking to promote access to suitable advice and reduce the burden of the FSCS bill on the broader adviser population. We plan to set out further details on this next year, as we explore solutions to the key drivers of harm in the market.”

I have flagged this before, as the FCA has dropped references to increases in capital requirements previously. But we now have more concrete timescales - a discussion paper/consultation next year perhaps?

The FCA has increased capital for retail firms in the past. But it had an awful lot of pushback form IFA's and others. And the capital levels are still significantly lower than most MiFID firms because of IFPR, introduced this year (i.e., with a base capital of 75k and 3 quarters of fixed overheads being the bare minimum).

As ComplyCraft noted then, however, if the FCA's stated aim for IFPR was to reduce FSCS costs, they were looking at the wrong firms. It is retail advisory firms (notably pension transfer specialists) and SIPP operators, most of which operate outside IFPR, who appear to have largely pushed up FSCS costs.

As the FSCS is not subject to the Freedom of Information Act, we only know what the FSCS/FCA make public, of course.

I do think this capital change is coming, and I think the increases could be quite substantial for some firms.

The 'interim' prudential Sourcebook (IPRU:INV) has been broadly untouched for years. Whilst guidance in the last few years 'introduced' a requirement for firms to consider capital/cash needed for winding down their firm, from a regulatory perspective it would surely be better if this is hard coded into the rules than just guidance.

I would be surprised if retail facing firms are not asked to hold enough capital and cash to wind down appropriately, taking into account potential FOS/FSCS claims from past business. Given the sums involved, this could cause quite a debate.

If such changes did go ahead, it could also push further consolidation in the market. And perhaps encourage 'big tech' to jump in with solutions, especially if Treasury/FCA alter the advice boundaries (stock and shares ISA) as suggested.

Certainly something to think about before taking out all those dividends at the next year end though...

Read the FCA’s update on their Consumer Duty Strategy here.