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The UK’s top financial regulator has unveiled proposals for investment advisers to be forced to set aside money to deal with the cost of potential redress schemes, ensuring the “polluter pays” when consumers are harmed.
The Financial Conduct Authority on Wednesday said it would consult on the proposals, which come months after the introduction of the Consumer Duty rules requiring companies to demonstrate fair value for clients.
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.”
Significant redress liabilities currently fall to the Financial Services Compensation Scheme, which paid out nearly £760mn between 2016 and 2022 for poor advice provided by personal investment firms that had subsequently failed. Almost all of this, 95 per cent, was generated by 75 firms. The redress is raised through a levy paid by regulated advice firms, though those in their first year of authorisation are exempt.
The draft rules would require personal investment firms to calculate the amount needed for their potential redress liabilities and set aside capital resources for them. Where firms are not holding enough capital to meet these needs, they will need to comply with an asset retention requirement.
The FCA said this would, in turn, create a “significant incentive” for firms to provide good advice and to “right wrongs quickly”, benefiting consumers.
The proposals will exclude the approximately 500 sole traders and unlimited partnerships from the asset retention requirements, as well as firms that are part of prudentially supervised groups, as they assess risk on a group-wide basis.
