FCA: The Polluter Pays

Posted on Dec 01, 2023. by NTI

The FCA has announced proposals to require personal investment firms to set aside capital in a proposed regime to cover the costs of compensating consumers.

The proposals seek to ensure that the ‘polluter pays’ for the redress costs that they generate, i.e. those that provide bad advice would have to set aside enough capital for compensation.

The FCA hope that this would act as a significant incentive for firms to provide good advice in the first place. It is intended that this would benefit consumers, given the important role investment firms (investment advisors) play in the decisions people make for their long-term future.

Sarah Pritchard from the FCA has 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.” 

She also added “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.”

This comes as the Financial Services Compensation Scheme (FSCS) has paid out nearly £760m between 2016 and 2022 for poor advice from financial advisory firms that had failed. According to the FSCS, 95% of this was generated by just 75 firms.

The proposals would also mean that firms that do not hold enough capital would be subject to automatic asset retention rules to prevent them from disposing of their assets. They are intended to be proportionate, and build on existing capital requirements.

Because of this proportionality, the measures would exclude around 500 sole traders and unlimited partnerships from the automatic asset retention requirements, the FCA claim.

This forms part of the FCA’s call for evidence into the Consumer Investment Markets and their Compensation Framework Review. As a result, they are extending their consultation period to 16 weeks.

The consultation will now run until 20 March 2024.

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