City brokers angry at new capital reserve regulations

Simon Evans
Sunday 24 January 2010 01:00 GMT
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City brokers, often dubbed the backbone of the Square Mile, could soon have to put more capital aside as regulators look to tighten rules regarding capital adequacy.

Brokers, who typically deal with smaller companies and clients compared to the big banks, are set to pay for the sins of their larger rivals despite steering a largely safe course throughout the recession.

Under changes to the Basel capital directive designed to improve the capital strength of big banks that have lost billions in the past two years, brokers may also have to put aside a larger proportion of their turnover as a risk-capital buffer.

Current rules dictate that a broker's operational risk capital is roughly calculated as 15 per cent of net income, based upon a three-year moving average.

A spokesman for the Financial Services Authority (FSA) said that the issue of regulatory capital among brokers was "one area under consideration" by the Bank of International Settlements, which has formulated new rules.

Senior figures within the FSA are believed to be fearful that some parts of the broking sector are too thinly capitalised and could collapse if the economy takes a double dip.

A number of brokers are thought to have broken regulatory capital guidelines last year, but a spokesman for the FSA said: "These breaches are often for technical reasons. On some occasions, companies have explained to us why they aren't putting up enough capital and showed how they plan to rectify it."

One broker, who declined to be named, said of the impending outlay: "Why should we have to put more money aside?

"It simply doesn't seem fair that we are paying for the profligacy of big banks. We are having to deal with the payroll tax at the moment too."

It's believed that a large number of brokers remain in the dark as to whether or not they will be hit by the payroll tax, announced in December's pre-Budget report, despite protracted dialogue with Her Majesty's Revenue and Customs.

London's brokers suffered a difficult 2009 but a predicted flurry of failures and consolidation failed to materialise.

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