The FCA has announced proposals that will place new capital requirements on personal investment firms.
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.
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.”
The FCA says 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 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.
It is hoped that the proposals will incentivise firms to ensure they provide good advice and correct mistakes quickly. “This will benefit consumers given the important role investment firms play in the decisions people make for their long-term financial future,” says the FCA.
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.
The consultation runs until 20 March 2024.
