Should we expect that Financial Advice Firms in the new advice law will be subject to capital requirements? There is already a financial dimension to licence applications for financial service providers, which indicates that this is an area considered by the regulator. The rationale is simple: service failures have a cost, is the business capable of rectifying mistakes and compensating clients where required to do so? Accepting that, to what extent should the regulator stipulate financial requirements? What will they look like? In other markets capital requirements have been developed.
Capital requirements allow the regulator to simplify their view of the financial capability of the business: instead of trying to work out if the business is sustainable, and focus on the minimum buffer required by the advice activity. The requirement for a level of capital means that the business has been able to prove a level of sustainability to investors and owners. It also means that when that capital floor is breached, the business is in breach of its licence conditions and must stop operating.