Investment Firms Risk Costs Surge on EU Capital Law, FCA Says

Small-scale broker dealers, wealth managers and other investment companies risk a leap in their compliance costs to meet tougher European Union capital rules “designed more with banks in mind,” a U.K. regulator said as it pledged to insulate the industry from unnecessary standards.

The U.K. Financial Conduct Authority said it would attempt to use flexibility in the EU law to spare as many as 1,000 of the 2,400 investment firms it regulates from the EU requirements set to begin phasing in from Jan. 1, 2014.

“In relative terms, the cost for small FCA related firms could be important,” the regulator said. According to FCA estimates, small investment firms, defined as those with less than 100 million pounds ($152 million) in assets, may face one-time compliance costs of as much as 20,000 pounds, with this rising to 350,000 pounds for larger companies.

The EU measures are intended to apply standards drawn up by global regulators to prevent a repeat of the crisis that followed the collapse of Lehman Brothers Holdings Inc. The EU legislation extends the scope of the measures -- known as Basel III -- to also cover investment firms, which the European Commission has said is necessary to avoid loopholes and competitive distortions.

The FCA said it would seek views until September on its plans for applying the EU rules, before publishing final guidance later this year.

While investment firms are bound by the EU measures, the 28-nation bloc has said it will carry out a review of prudential requirements for investment companies by the end of 2015.

Given this uncertainty, the FCA said it would seek for the time being to “do the legal minimum and, where possible, not seek to change current policy.”

“This should help firms to contain any overall increase in costs without reducing the benefit of protection for consumers,” it said.

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