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Investment advisers will be forced to set aside money to cover the cost of potential redress schemes under proposals by the UK’s top financial regulator that would ensure 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 display fair value for clients.
Sarah Pritchard, FCA executive director of markets and international, said the regulator wanted to “see a thriving financial advice market to make sure consumers can access the uphold 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,” she added.
At present, significant redress liabilities fall to the Financial Services Compensation Scheme, which paid out almost £760mn between 2016 and 2022 for poor advice provided by personal investment companies that had subsequently failed.
Some 95 per cent of the payouts were generated by about 75 of the almost 5,000 companies in the market. The redress is raised through a levy paid by regulated advice companies; those in their first year of authorisation are exempt.
The draft rules set out on Wednesday would demand personal investment companies to reckon the amount needed for their potential redress liabilities and set aside adequate capital.
If a company’s capital dips below its potential redress costs, it would face a range of restrictions on reducing the value of its assets.
Venetia Jackson, a lawyer at Pinsent Masons, said the announcement was “a significant proceed from the FCA to ensure compensation is available to customers who may otherwise be left with proving their claims to the FSCS when things go wrong”.
In one of the biggest scandals in UK personal finance history, about 8,000 members of the British Steel pension scheme transferred their guaranteed retirement benefits, worth £2.8bn in total, to riskier arrangements after obtaining financial advice between 2016 and 2018.
The FCA estimates that roughly 4,000 scheme members were wrongly advised when giving up valuable final salary-style pensions, exposing them to losses in later income.
The scandal sparked a regulatory crackdown and led the FCA to carry out a redress scheme that aimed to put savers back in the financial position they would have been at retirement had they stayed in the BSPS.
The watchdog, which will consult on the proposals until March next year, said it also wanted to cut compensation foresee times. They average nine years at present between the point of misconduct and redress being paid out.
The groups being targeted by the FCA mainly supply advice and arrange deals in retail investment products and are exempt from Mifid regulation, which dictates a minimum capital requirement of £750,000.
Personal advice companies are required to hold £20,000 or 5-10 per cent of their annual investment business income, whichever is higher. The average FSCS claim for investments is about £26,000, and the compensation limit is £85,000.
The FCA said it estimated that one-third of the market would have to set aside capital, with only 2 per cent subject to asset retention requirements. The estimated annual compliance cost for smaller companies is £1,000.