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Professionalism and Capitalisation

A Professionalism Group was set up by the FSA to make proposals on ways to increase the professionalism of advisers, or at least the public perception of it.

Scottish Life’s View

In common with the ABI, we didn’t believe the introduction of a long-stop would impact consumers significantly. We also think it unfair that advisers have an open-ended liability given existing legislation (the Limitation Act 1980) that sets limits for negligence claims. Its removal from the RDR is a real disappointment.

In the main, we welcome the Professionalism Group’s proposals. We think a single independent body for advisers and practicing certificates make a lot of sense for all parties and will do much to increase consumer confidence. However, given the short timescales for meeting these new standards, we are concerned at the news that it may take up to a year to devise a syllabus 6. This could involve wasted time for some advisers in the interim, and make the time to obtain the qualification even more daunting for advisers who are still deciding whether to work beyond 2012.  On a related point, we are obviously concerned about the potential impact on adviser numbers of forcing advisers with many years of experience to sit exams. We therefore welcome the possibility of a non-academic route to qualification on the condition it is the rigorous test of competency that the FSA say it will need to be.

While the first increase in Capital Requirements for 14 years (per the RDR paper) is understandable, a holistic analysis is needed of the combined effects of this and the RDR professionalism requirements on adviser numbers.

Qualifications

The key proposals were:

  • An Independent Professional Standards Board (IPSB) to be set up, independent of the industry, with a role across the whole investment advice sector.
  • The IPSB would oversee minimum qualification criteria and a new Code of Ethics. They would also deal with breaches of this code.
  • New Continuous Professional Development standards would be introduced by the IPSB.
  • A re-vamping of the FSA Register to make it easier for consumers to locate an advice firm.
  • A Practicing Certificate would be needed (and openly displayed) by advisers.

The FSA largely endorsed these proposals. They also highlighted that they believed the minimum qualification criterion should be set at QCA Level 4 (the equivalent of a diploma or first year of a BA degree) to be achieved by all advisers by the end of 2012. ‘Grandfathering’ has been ruled out but the FSA is still open to discussion for “on the job” training to meet minimum standards, so long as it is a rigorous test of competency. This will be for the IPSB to consider going forward.

Controversially, Lord Lipsey, chairman of the FSA’s consumer panel, resigned shortly after the paper’s release, citing that the regulator had not gone far enough to support his plans to tackle consumer issues. He had pushed for a minimum qualification of QCA Level 6 (degree level)1.

Long-Stop

In previous papers, the FSA has toyed with the idea of introducing a time limit on claims for negligence. This would bring the adviser community in line with the way that the Limitation Act 1980 sets limits for negligence claims.

In the latest paper, the FSA has ruled out the introduction of a time limit. It found it could not justify its introduction on the basis that the savings within the industry would largely be created by an expense to consumers – in other words, a long-stop would simply transfer benefit from consumers to advisers. The FSA acknowledged the disappointment this would create in the industry, and indeed Amanda Bowe, the former head of the review, voiced her disappointment at not being able to introduce it.1

Capitalisation

Not strictly within the RDR remit, but the proposals of a recent FSA paper on prudential requirements for Personal Investment Firms were re-highlighted. These proposals were:

  • Capital Resources: a simplification of the calculations and making them more consistent across firms. This would raise the quality of the capital held by firms.
  • Capital Requirements: the Expenditure Based Requirement would be based on three months of relevant annual expenditure and the minimum capital floor would be doubled to £20,000.
  • Professional Indemnity Insurance (PII): a sliding scale of additional capital would be required for potential liabilities not covered by a firm’s PII policies. The minimum would be £5,000.

AIFA believes that the potential impact on a firm of 20 advisers with approximately £1.6m costs would be to see its prudential requirements increasing from around £10,000 to around £300,000. 2

next: Conclusion

Sources:

  1. QCA fog could waste advisers’ time, warns Aegon
    Citywire, 2 December 2008
  2. Aifa urges FSA to consider regulatory dividends as rewards
    FTAdviser, 27 November 2008

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