WIREDGOV

The Financial Services Authority (FSA) has today published a consultation paper (CP) setting out proposed improvements to prudential requirements for Personal investment firms (PIFs) designed to help reduce the impact of market failures in the sector.

Richard Thorpe, Head of FSA Capital Adequacy Policy, said:

"Feedback from the industry supports our view that the current prudential regime for PIFs needs to be improved.  Our reforms, which will mean PIFs holding more capital resources where necessary, are designed to mitigate the impact of such firms on the Financial Services Compensation Scheme (FSCS) and to reduce the complexity of the capital resources rules.”

The proposed new regime, which builds on Discussion Paper 07/4 published in July last year and Feedback Statement 08/2 published in April 2008, includes:

• simplifying the calculation of capital resources and making it consistent for all firms;
• extending the Expenditure Based Requirement to all firms based on three months of annual fixed expenditure and raising the minimum capital resources level from £10,000 to £20,000 for all firms;
• mandating a sliding scale of additional capital resources that firms should hold as a provision against potential liabilities for any business or activity excluded from their professional indemnity insurance policies.

The prudential proposals are closely linked to the wider issues covered in the Feedback statement to the Retail Distribution Review (RDR) published earlier this week and, subject to consultation, will be fully implemented by December 2012 in line with the RDR timetable.

Notes for editors

1. Consultation Paper 08/20: 'Review of prudential rules for personal investment firms' is available on the FSA website.
2. DP07/4: 'Review of the Prudential Rules for Personal Investment Firms' and FS08/2: 'Review of the Prudential Rules for Personal Investment Firms - Feedback on DP07/4' are available on the FSA website.
3. The FSA's Retail Distribution Review Discussion paper was published on 27 June 2007.
4. Personal Investment Firms (PIFs) are broadly those firms which derive the bulk of their business from advising on and arranging transactions for retail customers.  The CP proposes requirements for PIFs that fall outside the scope of the Markets in Financial Instruments Directive (MiFID).  There are over 5,000 such firms authorised by the FSA.  The majority of them are small: 83% have fewer than five advisers.
5. The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; securing the appropriate degree of protection for consumers; and fighting financial crime.
6. The FSA aims to promote efficient, orderly and fair markets, help retail consumers achieve a fair deal and improve its business capability and effectiveness.
7. The Financial Services Compensation Scheme (FSCS) is the UK's statutory fund of last resort for customers of authorised financial services firms. This means that FSCS can pay compensation if a firm is unable, or likely to be unable, to pay claims against it. FSCS is an independent body, set up under the Financial Services and Markets Act 2000 (FSMA).