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Update

The FCA has announced proposals to require personal investment firms (PIFs), often referred to as investment advisers, to set aside capital so that they can cover compensation costs. 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 measures have been put in place as the FCA is concerned that some PIFs are causing consumers harm. Significant redress liabilities are falling to the Financial Services Compensation Scheme (FSCS), and the FCA therefore wants to strengthen the prudential requirements so that PIFs have to hold more capital for redress.

The proposed changes in the Consultation Paper 23/24 require PIFs 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 it from disposing of its assets.

Firms must not seek to avoid potential redress liabilities. This could include actions such as changing the corporate structure to isolate liabilities and protect assets (including selling or transferring the client bank), overpaying dividends, or allowing the firm to run into an insolvent position. The FCA will consider appropriate action against any firms or individuals who have sought to avoid potential redress liabilities. This may include using enforcement and/or supervisory powers against these firms or individuals.

During this consultation period, the FCA is carrying out increased monitoring of firms applying to cancel or seeking to apply for new authorisations consistent with its current expectations of PIFs under the Consumer Duty. This is to prevent firms and individuals from attempting to avoid potential redress liabilities or otherwise trying to phoenix. More detail on the FCA’s approach can be found in the “Dear CEO Letter” sent on 29 November 2023.

Thistle can assist your firm in a number of ways, by helping to calculate the prudential requirements to hold more capital for redress and by reviewing your Consumer Duty documentation to ensure it meets the current expectations for PIFs.

Link: https://www.fca.org.uk/news/press-releases/personal-investment-firms-bad-advice-hold-capital-redress

https://www.fca.org.uk/publications/consultation-papers/cp23-24-capital-deduction-for-redress

https://www.fca.org.uk/publication/correspondence/dear-ceo-letter-capital-deduction-for-redress.pdf