Shifting the focus away from the Financial Services Compensation Scheme and onto capital adequacy is not a "silver bullet" and risks unintended consequences, according to the latest edition of the FTAdviser Podcast.
In its recent business plan for 2021-22, the Financial Conduct Authority said it would be conducting a review into the scope and coverage of the FSCS, potentially putting greater emphasis on capital adequacy instead.
But speaking on the podcast, Tim Fassam, director of government relations and policy at Pimfa, said it risked increasing the capital requirements of firms already doing the right thing and therefore costs for consumers.
He said: "One of the issues is, if you look at the big compensation bills that have come through, people stepping outside of their regulatory permissions.
"So if you are looking at the potential impact of a firm failing, and what that may mean when they assess how much capital they should hold, are they going to assess on the basis that a firm may do things that they don't have permission for?
"Would they have asked [London Capital & Finance] to hold capital on the basis that they might have stepped over the line and given advice? That would be quite hard to justify to say 'we are going to capitalise you for things you might do, that you don't have permission to do, and you say you are not going to do'. That would catch an awful lot of firms who are doing the right thing and are staying within their permissions."
But Fassam did say the FCA's proposal for a 'regulatory nursery' for newly authorised firms - which would provide them with greater oversight during their first few years - was "sensible" and would, along with other measures, help address the issue of the levy.
He was joined on the podcast by Neil Moles, chief executive of Progeny Group, agreed there should be more of a focus on stopping firms from stepping outside their regulatory permissions.
Moles said: "We've got a lot of next generation firms starting up, which is superb to see, new technologies and new ways of doing things and we have to support that.
"If you are going to shift it onto a capital adequacy requirement, unless you can ringfence that capital securely somewhere, it is an irrelevance.
"Unless you are going to make firms lodge a deposit with the FCA to say 'here's my capital, you can have that and I'll have it back when I deauthorise in many years to come' I just don't see how capital adequacy is the route that we should be following here. We are not attacking the right problem."
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