FCA to require personal investment firms to set aside capital to cover compensation costs
The UK Financial Conduct Authority (FCA) today announced proposals to require personal investment firms to set aside capital so that they can cover compensation costs and ensuring the polluter pays when consumers are harmed.
The proposals would require personal investment firms – 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.
The Financial Services Compensation Scheme (FSCS) paid out nearly £760 million between 2016 and 2022 for poor advice provided by failed personal investment firms. 95% of this was generated by just 75 firms.
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.
The FCA is keen to hear what industry and other stakeholders think of these proposals. They build on over 250 responses to the FCA’s previous call for input on the Consumer Investments Markets and the Compensation Framework Review. Recognising the importance of getting this right, the FCA is extending its consultation period to 16-weeks. This will be supplemented with an extensive programme of industry outreach.