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FSA/PN/151/2009
6 November 2009

The Financial Services Authority (FSA) has today set out its new prudential regime for personal investment firms (PIFs) to ensure that they are better capitalised to withstand any future financial shocks.

Under the new rules, all PIFs will have to hold capital resources worth at least three months of their annual fixed expenditure in realisable assets such as cash.  The minimum capital resources threshold for any firm will be set at £20,000.

Requiring PIFs to hold more capital resources will enable firms to provide redress for consumers and limit the compensation due from the Financial Services Compensation Scheme (FSCS) in the event that they are wound up.

Following feedback from the industry, the transition to the new regime has been extended by a year to 31 December 2013, allowing firms more time to comply with the requirements.  Firms will also be able to take into account any changes arising from the Retail Distribution Review. 

Paul Sharma, FSA director of prudential policy, said:

One of the lessons learned from the current crisis is that firms need to hold enough capital resources in order to weather future financial storms.  Having a clear, consistent regime for all personal investment firms will provide better protection for consumers and the industry from the fall-out when firms fail.

"We have listened to the industry and are phasing in the new regime to allow time for them to adapt to the changes.  However, we expect firms to start considering now what resources they will need to have in place."

As a follow-up to the consultation, the FSA is considering how expenditure-based capital resources requirements can be applied consistently to all PIFs, particularly those with commission-based business models.  The FSA will also consult in 2010 on an appropriate prudential regime for pension and third party administrators.

Notes for editors

1. Final rules and policy statement PS 09/19.
2. Under the new regime, firms will have to hold capital worth a month of their annual expenditure by 31 December 2011. This will increase to two months in 2012 and three months by 31 December 2013.
3. The Feedback Statement and Consultation Paper on prudential rules for PIFs are available on the FSA website.
4. The FSA's Retail Distribution Review Discussion Paper was published on 27 June 2007.
5. Realisable assets include, but are not limited to,  cash, trade debtors unpaid for 90 days or less and accrued income receivable within 90 days
6. 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 policy statement sets out rules 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.
7. 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.