Around 5,500 firms will be affected by the Financial Conduct Authority’s “polluter pays” proposed framework, the authority has estimated.
Following the announcement of the framework earlier today, the FCA specified that investment intermediaries would be affected under the proposals.
More specifically, firms which are in scope are “those that mainly provide advice and arrange deals and retail investment products and are exempt from the UK’s interpretation of Mifid”.
It added that there are about 5,500 of these firms that “should be reading” the proposals, but certain firms would experience some level of exemption.
One such example were firms which were part of larger groups which were subject to higher or comparable standards of capital regulation already.
“If you read the consultation in detail we are proposing that those who are subject to higher standards, differing credential regimes, will be exempt from this,” the FCA explained.
Additionally, the authority also proposed that around 500 sole traders and unlimited partnerships would be excluded from the asset retention rules.
This is because it doesn’t think it would be appropriate to apply those rules automatically to the personal assets of these firms.
The FCA explained that while the 5,500 firms need to read the consultation paper, there’s about 625 firms that could qualify for some level of exemption.
But the regulator cautioned: “It’s not necessarily automatic that all firms are exempt and it’s right that you read the [consultation paper]”.
Step-by-step breakdown
The FCA said its framework could be broken down into four key steps.
The first step is that firms should be able to identify where they need to pay redress in the future, which can be done by monitoring customer outcomes under consumer duty.
Secondly, where firms do identify potential redress liabilities, the FCA wants them to quantify those liabilities, something for which the proposed rules set up a prescribed way to do.
The authority explained that firms will have to estimate the funds needed to pay redress for unresolved complaints or future redress from recurring or systemic issues and foreseeable harm.
This will be calculated for each impacted customer to form the firms potential redress liabilities.
Firms will then be allowed to offset this by factoring in professional indemnity insurance and applying a prescribed probability factor which recognises that not all complaints are upheld or issues once investigated lead to a redress payment.
Step three is for firms to set aside the capital to meet these potential redress liabilities, with this deduction intended to be built into the regulatory return on the firm's capital resources.
The last step outlined by the authority was a proposed automatic asset restriction for the firms that do not have enough capital to redress liabilities.
This means that firms can only make payments in the ordinary course of business.
As a result, the FCA hopes that this will cause them to build up their capital levels over a period of time and prevent them from dissipating assets to avoid those liabilities.
The FCA believes more firms will be able to provide proactive redress to consumers where they’ve caused harm and, over time, reduce the time consumers wait for redress.
The authority also stated the framework should lead to fewer firms failing because they can’t meet their redress costs, thereby reducing the burden on the Financial Services Compensation Scheme.
Additionally, since FSCS compensation is capped at £85,000, the FCA expects consumers will have fewer uncompensated losses.
It should incentivise firms to provide good advice in the first place and avoid causing harm from the outset.
Reaction
In response to the authority’s announcement, Quilter chief executive Steven Levin, said he was “fully supportive” of the polluter pays model.
“While we need to understand the detail, it is likely that quality firms will broadly support this type of reform, which could serve to build trust with consumers and give greater confidence in advice in the longer term,” he added.
Levin also stated that, while it may create additional work for smaller firms, it is “better than the current unpredictable and significant ad-hoc costs under the FSCS”.
A similar sentiment was shared by Pimfa chief executive Liz Field, who said: “We strongly believe in, and have argued the case for a number of years, for a ‘polluter pays’ model.”
But Field stressed “the need for these proposals to be proportionate”, and specifically not to act as a “barrier” to firms wishing to enter the market.
In addition, the Lang Cat director of public affairs Tom McPhail cautioned that, if the capital reserving requirements were “too broad” they could become an “expensive addition to the cost of doing business in their own right”.
“Hopefully the proposals will take account of the practices and processes of responsible and well-run businesses, thereby ensuring they see a net reduction in their overall cost of doing business as a result of these measures,” he added.
Next steps
The authority acknowledged that it has been unable to engage with a wide variety of stakeholders before launching the consultation and, as a result, announced it would extend the period for the consultation and responses to be received to 16 weeks.
“We are really keen to hear views and encourage anyone with an interest to respond to the consultation,” it said.
The FCA concluded by stating: “We believe we have put forth a package of measures that will really help the advice sector to flourish and deliver good consumer outcomes.”
tom.dunstan@ft.com
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