New rules for personal investment firms to hold capital for redress
The Financial Conduct Authority (FCA) has published new proposals to require personal investment firms (PIFs) to set aside capital so that they can cover compensation costs when consumers are harmed.
The proposals, which are now out for consultation, would require PIFs – also often referred to as investment advisers – to calculate their potential redress liabilities at an early stage, set aside enough capital to meet them and report potential redress liabilities to the FCA.
Any firm not holding enough capital will be subject to automatic asset retention rules to prevent them from disposing of their assets.
Sarah Pritchard, executive director of markets and international at the FCA, said: “We want to see a thriving financial advice market to make sure consumers can access the support they need from financially resilient advice firms that want to do the right thing.
“Diligent advisers are having to compensate through the levy for the bad advice of their failed competitors. That needs to change. It is important that the polluter pays.
“We want to hear from industry and consumer groups on our proposals. Please do let us know what you think so that we can reform the way the current framework operates to ensure that those polluting the sector pay.”
The Financial Services Compensation Scheme (FSCS) paid out nearly £760m between 2016 and 2022 for poor advice provided by failed personal investment firms. All but 5% of this was generated by just 75 firms.
The FCA said: “The proposals seek to ensure that the polluter pays for the redress costs they generate. It will be those who provide bad advice who will be responsible for setting aside enough capital to compensate for it.
“In turn, the proposals will create a significant incentive for firms to provide good advice in the first place and to right wrongs quickly. This will benefit consumers given the important role investment firms play in the decisions people make for their long-term financial future.
“The proposals are designed to be proportionate, building on existing capital requirements. The measures would exclude around 500 sole traders and unlimited partnerships from the automatic asset retention requirements. Firms that are part of prudentially supervised groups, which assess risk on a group-wide basis, would also be excluded.”