Financial advice firms in the UK are currently stuck between a rock and a hard place amid the coronavirus pandemic.
Under regulatory requirements, to meet capital adequacy threasholds they have to hold either £20,000 or 5% of their investment income, whichever is higher, at any given time.
But the Financial Conduct Authority (FCA) said earlier this month that the UK government loans rolled out to give relief during covid-19 cannot be used to meet such requirements.
Additionally, the regulator said that advice firms must renew their professional indemnity (PI) insurance in a timely manner, regardless of the pandemic.
As a result, businesses are struggling.
Negative outlook
According to a survey of 166 advisers by industry network Panacea Adviser, 44% expect to furlough members of staff in the next three months.
Additionally, 14% believe their firm will not survive the pandemic without access to funding, and 18% of those who took part to the survey have applied for the government scheme.
These financial burdens are hitting businesses hard and 76% believe there should be a “regulatory fee holiday” for advice firms until 2021.
Similarly, 77% stated that PI cover should be automatically renewed for another year for firms with claim-free status.
Industry-wide burden
The network said that unless measures are taken to safeguard both firms and the industry, the companies that will be left standing at the end of the pandemic will have to shoulder an even greater financial burden.
Panacea Adviser added: “The Treasury and FCA will need to look at some protection for the intermediated advisory world; distribution is the weakest part in the world of financial services when it comes to capital adequacy.
“To summarise in a very blunt way, for some firms, large and small, a substantial Financial Ombudsman Scheme adjudication or Financial Services Compensation Scheme call for money, or both, will see firms just collapse, in turn placing that burden on those firms that are left.
“With a backdrop of businesses running or trying to under lockdown, increasing home working operating costs are being further complicated by rising regulatory fees, unexpected FSCS cash calls and increasing PI costs, […] the results do not paint too good a picture.”
