FCA Capital issues for IFA firms going DFM
Written on 03/07/2020

FCA Capital issues for IFA firms going DFM

Flush from the good news on Tatton, where VAT is no longer apparently payable on model portfolios run by DFM firms, we get tough news from our old friends in Stratford East London, who rule over our lives. 

FCA discussion paper on capital issued last week has proposed increasing the minimum capital adequacy on DFM firms to EUR75k.

This can be read across as pretty much £75k sterling, since the currency fluctuates, and you’ll need a buffer.

In the same paper FCA have also moved to push capital definition to “as appropriate” as opposed to the older language which referred to “adequate” capital resources.  Once again this pushes the envelope of principled based regulation, – meaning higher buffers are needed today in the DFM world.  You can see the pressure that this puts challenger firms like Tavistock under - with their staff taking pay cuts / furlough.

Also buried in the paper is some indication of direction of travel for other regulated firms.

•    group service companies and prudential consolidation. The FCA specifically comments that in its view the concept of an ‘ancillary service undertaking’ is broad enough to include any group service company.  The FCA notes that this is particularly important in the context of the consolidated fixed overheads requirement and prudential consolidation 

This is an important move.  DFM groups have traditionally parked unwanted liabilities and costs into non regulated subsidiaries up and down the supply chain like in any other industry - marketing and consultancy firms, IT departments, employee staff costs and management and so on.  The whole point of a group of companies accounts, is to offset profit and losses against each other to reduce tax.  Yes it is clever-dick accounting, but they all do it, and FCA are looking to stop it.

This move on DFM firms takes that advantage away, and is one to watch for IFAs, who currently do not need to consolidate accounts at all, and very often park income and assets into separate non regulated firms – usually with the aim of keeping the regulatory surplus capital as low as possible.   After all, if the asset is declared to the FCA, it means it is also at risk from the FCA sending you a casual email saying “please do not take out any further capital from your business.”  This email is, in almost all cases, the end of the road for the smaller regulated firms.


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