The Financial Conduct Authority (FCA) has announced proposals to require personal investment firms to set aside capital to cover compensation costs and ensure polluters pay when consumers are harmed.
It would require investment advisers to calculate their potential redress liabilities and set aside enough capital to meet them as well as report these liabilities to the FCA.
The regulator has said any firms not holding enough capital will be subject to automatic asset retention rules to prevent them from disposing of their assets.
The Financial Services Compensation Scheme (FSCS) paid out nearly £760m between 2016 and 2022 for poor advice provided by failed personal investment firms, 95% of which was generated by 75 firms.
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.”
To read more on this topic, visit: FCA to consult on VFM framework for DC workplace pensions
The FCA will be running a 16-week consultation process to seek industry and stakeholder views on the proposals.
Proposals welcomed
Tom McPhail, director of public affairs at the lang cat, commented that these proposals will be welcomed by well-run advisory firms who have to pay the costs of the ‘irresponsible’ actions of a few bad actors in the sector.
He said: “If the capital reserving requirements are too broad or too onerous though, they could become an expensive addition to the cost of doing business in their own right. Hopefully the proposals will take account of the practices and processes of responsible and well-run businesses, thereby ensuring they see a net reduction in their overall cost of doing business as a result of these measures.”
Counterproductive
However, Scott Gallacher, director at Rowley Turton, said that as an IFA he is wary of the proposals as he feels that penalising unsuccessful firms with substantial capital seems counterproductive.
He added: “It also poses a risk to directors, as income through dividends could be suspended, despite existing company law covering such scenarios. This might steer businesses towards alternative remuneration, impacting advisers’ tax positions and discouraging new entrants.
“Consequently, firms may operate with minimal capital, raising doubts about the regulations’ overall effectiveness. There’s a genuine concern that these proposals could inadvertently trigger a race to the bottom in capital reserves, contradicting the FCA’s goal of ensuring stability and consumer protection.”
Burden on smaller firms
Daniel Wiltshire, an IFA at Wiltshire Wealth, highlighted the extra burden these proposal will place on smaller firms.
He said: “In principle, the ‘polluter pays’ framework sounds sensible, however, as always the devil will be in the detail. A concern I have is that if extra capital has to be set aside, regardless of whether the claim is being contested, this could place a disproportionate burden on smaller firms. This would be anti-competitive and ultimately bad for the consumer.”
On the other hand, Steven Levin, chief executive of Quilter, said the firm fully supports the proposals.
While he pointed out that it may create additional work for smaller firms he said that it would be better than current ‘unpredictable’ costs under the FSCS.
He commented: “While it may create additional work for smaller firms, as they will need to rigorously understand any potential need for future redress, it is better than the current unpredictable and significant ad-hoc costs under the FSCS which makes effective business planning difficult and can have a knock-on impact on investment in other areas.
“Through a more rational model for the capital that needs to be set aside and the right support that enables good client outcomes on a consistent basis, firms will be able to invest in the future growth of their business without the uncertainty of unexpected levies derailing their plans.”
