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Understanding the capital adequacy requirements for PiFs from June 2016

It is absolutely vital advisers understand the FCA’s New Capital Adequacy requirement for PIFs which comes into force on 30 June 2016. ATEB Consulting’s Steve Bailey offers some guidance

In our capacity as compliance consultants we have been receiving requests for clarification on the impact for adviser businesses of the FCA’s New Capital Adequacy requirement for personal investment firms (PIFs), which comes into force on 30 June 2016. The FCA’s Policy Statement can be accessed here.

The following should help clarify what the changes mean to you. Since the majority of investment firms affected by the changes are classed as ‘B3’ ie, those that don’t hold client money under the MIPRU rules, the short example below is focussed on them.

Initially you need to calculate 5% of annual income* generated from your investment business.

(* Annual Income from investment business is income derived from designated investment business. See the definitions here).

For firms also subject to the MIPRU (Mortgage and Insurance Intermediary Prudential) rules, you then need to add 2.5% from your home finance and non-investment insurance income.

Remember however, that from 30 June 2016, the minimum requirement is £15,000 . Therefore, if the total calculated is less than £15,000, your base capital adequacy figure is £15,000 (rising to £20,000 from 30 June 2017).

The FCA has provided a useful calculator to give you an idea what your base requirement is likely to be. However please remember to add any additional requirements you may need to hold because of a non-compliant PI policy excess, or for exclusions written into your PI policy. The calculator can be located here.

Recommended action:

• It is absolutely vital that you understand the requirements;

• The example quoted is for B3 firms not holding client money so you will need to tailor the calculation to your firm’s profile;

• Key your figures into the calculator; and

• Add any additional figures for PI exclusions and excesses to the output;

• Ensure you meet, or have plans to meet the new requirements at all times.

Visit the ATEB Consulting website

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