Increased cap ad will force 25% of IFAs out of business, says Aifa

The Financial Services Authority's (FSA) proposals on prudential requirements will force more than a quarter of firms out of the industry and tie up precious capital according to the Association of Independent Financial Advisers (Aifa).

A survey of Aifa members suggested that the current proposals to raise the prudential requirement for small firms to £10,000 could force more than 27% of firms to leave the industry.

The industry body has suggested the FSA consider an alternative form of ‘counter-cyclical’ capital requirements which would allow firms to accrue capital during good times that could then be used to help during periods of difficulty.

Andrew Strange, director of policy at Aifa, said the outcome of proposals would be counter to government policy, causing valuable firms to leave the industry.

'As they stand, the proposals will force good firms to leave the industry - a fact crudely acknowledged by the 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.'

He added: 'Aifa proposes 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 research further indicates that if the FSA persist with the proposed requirements, over 50% of firms could have to find additional capital. 

To counter this, Aifa has proposed the regulator consider reducing the expenditure based requirements (EBR) to six weeks rather than thirteen, reduce minimum capital to £15,000 from £20,000 and extend the transition period to 2014.