Capital Adequacy For IFA practices and the use of subordinated loans

PS15/28: Capital resources requirements for personal investment firms (PIFs) is essential reading for the owners of Directly Authorised IFA practices.  New capital requirements will apply from June 2016 and will result in all Firms having to review and potentially increase the amount of assets set aside to meet the new minimum capital requirements.  

For PIFs (Personal Investment Firms) the new requirement will be the greater of £20,000 or 5% of the Firms Investment Business annual income.

Where the Firm has permission to manage portfolios of, deal as principal in, or hold client money for life policies the capital requirement increases to 10% of the Firms Investment Business annual income.

The Financial Conduct Authority have confirmed that Small Firms will have an interim minimum capital requirement of £15,000 or 5% from June 2016 rising to £20,000 in June 2017.

Subordinated Loans: Personal Investment Firms

The repayment of a subordinated loan remains the same as previously, meaning that the loan may only be repaid where the firm holds 120% of its capital requirement once the loan has been repaid.

By way of example:

Turnover £200,000

Subordinated Loan £20,000

Minimum Capital requirement: £24,000 (£20,000 x 120%)

Capital and Reserves: £40,000

Here, as the 120% threshold has been reached the Firm could consider seeking permission to reduce the subordinated loan by up to £16,000  (£40,000 - £24,000).

From June 2017 Personal Investment Firms will be restricted as to the maximum amount of a subordinated loan may be included in the capital adequacy calculations:

([Amount of a firm's capital and reserves] – [Intangible assets and preference share capital]) x 400%

For any amount of the subordinated loan exceeds this calculation, the excess must be treated as a liability against the calculation of own funds.

The revised rules do not provide a list of how this capital requirement must be held or detail how certain assets have to be revalued (depreciated).

For more help contact us at www.compliantsolutions.co.uk