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The Actuary The magazine of the Institute & Faculty of Actuaries

Asset managers urged to prepare for 82% capital requirement increase

UK-based asset managers visited by the Financial Conduct Authority (FCA) over the last four years have been asked to hold an extra 82% in capital on average.

Inadequate capital levels ©iStock

That is according to new research by KPMG, which warns some firms have seen their share prices fall, and had to cancel dividends or ask parent companies for cash, as a result.

Although there has been a strong improvement in capital planning and stress testing this year, the research suggests companies have some way to go before their own assessments align with those of the regulator.

“Every pound held in capital is a pound that can’t be invested in growth, digital or implementing regulation,” KPMG UK asset management partner, David Yim, said.

“Firms need to work fast to bridge the gap between the capital levels considered adequate by the internal team and the FCA, otherwise they could find themselves with a sudden and drastic hit to available capital.”

The research shows every studied asset manager visited by the regulator since 2013 has been asked to increase their capital, with mid-sized firms told to hold £31m more on average.

Although the average capital surplus among investment firms was found to be 164%, there is significant variance across companies, with those recently visited by the FCA holding less than half the amount of those that haven’t.

It was also found that the regulator is increasingly turning its attention to smaller firms that typically get assessed entirely on paperwork without face-to-face interviews.

This is thought to leave them further exposed to a potential capital hit, with smaller companies less likely to have robust risk strategies, despite already being disproportionately affected by the cost of regulations.

“We have seen a continual improvement in risk management across the industry, however, there is still a lot of work to be done,” Yim continued.

“Given the potential damage to business, and in an increasingly tough regulatory and commercial environment, firms need realistic, defendable capital assessments, or else the regulator will soon do it for them.”

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