The Financial Conduct Authority (FCA) is considering forcing personal investment firms that give bad advice to hold cash aside to cover compensation costs.
The financial regulator is proposing a so-called “polluter pays” model, meaning incompetent firms would bear the cost for their failures 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 would be subject to automatic asset retention rules to prevent them from disposing of their assets.
Sarah Pritchard, FCA executive director of markets, 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.”
‘Polluter pays’
The Financial Services Compensation Scheme (FSCS) paid out nearly £760m between 2016 and 2022 for poor advice provided by failed personal investment firms. About 95% of this was generated by just 75 firms.
The FCA 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 would create a significant incentive for firms to provide good advice in the first place and to right wrongs quickly. The FCA said this would benefit consumers given the important role investment firms play in the decisions people make for their long-term financial future.
The FCA said 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.
‘Proposals will incentivise good advice’
Liz Field, chief executive of the Personal Investment Management and Financial Advice Association (PIMFA), said: “We note the FCA’s proposals on extending capital requirements to personal investment firms to cover future consumer redress.
“We strongly believe in, and have argued the case for a number of years, for a ‘polluter pays’ model to compensate consumers that have received a poor outcome, and we are aware of the moral hazard the existence of the Financial Services Compensation Scheme (FSCS) provides for well-run firms funding the misdeeds of others.
“We would stress the need for these proposals to be proportionate, and specifically not to act as a barrier to firms wishing to enter the market. While we do strongly believe that these proposals will incentivise good advice, the FCA must be mindful that it does not strangle the supply of advice to consumers.
“We look forward to engaging with the consultation process and would urge the FCA to be mindful to the fact that, at least initially, firms will face the prospect of two charges by way of the FSCS levy and the requirement to hold additional capital as proposed. We still believe additional sources of funding to subsidise the FSCS levy should be considered to reduce this burden and would continue to urge the FCA and Treasury to consider FCA fines to subsidise the FSCS levy in the short term.”
