On 29th November the FCA published a "Dear CEO" letter to Personal Investment Firms concerning potential changes to the Prudential Regieme.
The letter reminds Firms about their ongoing responsibilities and the need to maintain adequate capital resourses. The FCA have concerns that some might try and avoid their liabilites via Corporate Restructures or Asset disposals.
Firms will be required to submit a Sup 15 Annex 4 Notification to the FCA if :
Insufficient resources to cover redress
Plans to sell / transfer client bank - impact on risk profile, value or resources
Firm has potential redress liabilities & wants to offer consumers less redress than might be due
Interestingly, the proposals will not apply to Partnerships or Sole Traders - both of whom have unlimited personal liabilities. Neither will the proposals apply to MIFID II Firms which have a £75,000 minimum capital requirment.
Principals with Appointed Representatives will need to set aside adequate additional capital resourses taking into account activities of their ARs.
Additional Capital requirments
If the proposals are implemented as set out in the Consultative Paper then where a Firm receives a complaint then additional capital will need to be held for the duration of the complaint until the matter has been settled or the FOS 6 month rule as concluded. By way of example, where the Firm has a £5000 policy excess then an additonal £1400 (28% of £5000 excess) will need to be retained. Firms will need to record this and the FCA will be updating RMA D1 as well.
So far so good, but should the Firm identify a systemic failing - perhaps as a result of a failure to meet the New Consumer Duty Obligations then by way of example, the calculation would be (number of potential clients affected x £1400).
After a Firm notifies FCA of a regulatory capital breach under these rules, FCA will generally expect it to submit a remediation plan. FCA will ask the Firm for this, and would expect to receive the remediation plan within 10 business days of the request.
Chapter 6
For some reason the FCA have included a Discussion Paper within the Consultative Paper - and little comment has been made in the trade press about this Chapter.
MIFID Firms £75,000 Capital Adequacy
CAD exempt - £75,000 by 2027
PIFs - >£20,000 or 5% of Turnover + PI excess + PI exclusions
Q26: Are there any reasons PIFs should have significantly lower minimum capital requirements than other firms carrying out broadly similar activities?
Are Firms sleepwalking into having a significantly higher minimum capital requirment in a couple of years time?