AIFA believes the proposals will not achieve FSA's aim of reducing the impact of future market failures in the sector. Instead, AIFA thinks the proposals will simply force good firms out of the industry, and tie up precious capital, counter to Government policy. A survey of AIFA members showed that the current proposals could force more than 1 in 4 (27%) of firms to leave the industry.
AIFA suggests FSA should consider an alternative form of ‘counter-cyclical' capital requirements. This would allow firms to accrue capital during good times that can then be used during periods of difficulty. Pursuing work on Leaving Resources Behind (LRB) would also actively support FSA's work.
Andrew Strange, director of policy at AIFA, said: "As they stand, the proposals will force good firms to leave the industry - a fact crudely acknowledged by FSA in the Consultation Paper - a fundamental breach of the social contract between a regulator and the regulated.
"At a time when firms large and small are struggling in a challenging economic environment, direct and specific action by a regulator that reduces consumer access to advice is alarming.
"AIFA propose that the regulator reconsiders their work on this paper. This includes considering alternative approaches, such as counter cyclical or risk based requirements. These would be more successful at addressing the underlying issue which FSA aim to tackle."
AIFA's own research demonstrates that if FSA persist with the proposed requirements, over 50% of firms may have to find additional capital. Alternative approaches, which in themselves will not address the real issue, but which would minimise disruption to firms include:
- Reducing the Expenditure Based Requirements (EBR) to six weeks rather than thirteen
- Reducing minimum capital to £15,000 from £20,000
- Extending transition period to 2014
