The Financial Conduct Authority (FCA) has proposed rules requiring advice firms to reserve capital specifically for compensating bad investment advice, in a bid to shift the financial burden of compensation from the broader industry to the firms responsible for poor advice.
Under the new ‘polluter pays’ framework, firms offering investment advice will be required to calculate their potential redress liabilities early on and hold sufficient capital to cover these costs and report these potential liabilities to the FCA.
Firms not meeting the capital requirements will face automatic asset retention rules, preventing them from disposing of assets.
It comes after nearly £760m in compensation was paid out by the Financial Services Compensation Scheme (FSCS) between 2016 and 2022, attributed primarily to failed personal investment firms. Some 95% of this was generated by just 75 firms.
The FCA said its proposals “ensure that the polluter pays for the redress costs they generate”, as those firms that provide bad advice will be responsible for setting aside enough capital to compensate for it.
It also hopes the rules will create a significant incentive for investment advisers to provide good advice in the first place and to right wrongs quickly.
Sarah Pritchard, executive director of markets and international at the FCA, said: “We want to see a thriving financial advice market where consumers have access to support from financially resilient advice firms committed to doing the right thing.
“It’s time to change the current system where diligent advisers compensate for the failures of their peers.”
The FCA said it had designed the approach to be balanced and proportionate, excluding around 500 sole traders and unlimited partnerships from the automatic asset retention requirements. Firms within prudentially supervised groups, which assess risk on a group-wide basis, will also be exempt from certain measures.
The consultation period for this proposal is open until 20 March 2024, inviting feedback from industry stakeholders and consumer groups. The FCA’s consultation paper on the proposal can be found here.