FCA Implements "Polluter Pays" Rule to Safeguard Personal Investments

by Damian Chmiel
  • New reserves would cover poor advice redress.
  • The regulator is now starting the consultation period, which runs until March 2023.
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The Financial Conduct Authority (FCA) has unveiled new proposals requiring personal investment firms to maintain adequate capital reserves to cover compensation costs in cases where consumers suffer due to poor financial advisory. This initiative aims to ensure that firms responsible for harmful advice bear the financial consequences, adopting a "polluter pays" principle.

FCA Proposes Mandatory Capital Reserves for Investment Firms

Under these proposals, investment advisors must proactively assess potential redress liabilities, ensuring sufficient capital is set aside for compensation. Firms falling short of the required capital will face automatic asset retention rules, preventing asset disposal.

This measure follows the revelation that the Financial Services Compensation Scheme disbursed nearly £760 million from 2016 to 2022 for substandard advice from failed investment firms, with 95% of this amount originating from just 75 firms.

“We want to see a thriving financial advice market to make sure consumers can access the support they need from financially resilient advice firms,” said Sarah Pritchard, the Executive Director of Markets and International at the FCA. She further emphasized the importance of a resilient financial advice market, noting the unfair burden diligent advisors currently bear due to their failed competitors.

The FCA actively seeks feedback from industry and consumer groups on these proposals, extending the consultation period to 16 weeks and planning extensive industry outreach. The FCA's approach is designed to be proportionate, building on existing capital requirements. About 500 sole traders and unlimited partnerships will be exempt from automatic asset retention rules. Also, firms under prudentially supervised groups with group-wide risk assessments will be excluded.

The FCA plans robust engagement with industry and consumer groups as part of the consultation process, which runs until March 2023. Accompanying the consultation paper, the FCA has issued an infographic summarizing the proposals and communicated expectations to firms regarding existing liabilities.

FCA

Aligning with Broader Strategies

These proposals align with the FCA's consumer investments strategy, aiming to bolster consumer confidence in investment firms. They also resonate with the FCA's three-year strategy focused on reducing harm, setting higher standards, and fostering positive change.

In other regulatory updates, the FCA intensified actions against firms with dormant licenses, a measure to mitigate risks associated with inactive firms misleading consumers. Over 1,100 business lines have been influenced, either through license cancellations or its voluntary surrender by firms.

The FCA's report for the third quarter revealed the review and amendment of over 5,300 financial promotions, predominantly in the retail investments and lending sectors. This action followed the introduction of stricter financial promotion rules for crypto assets.

Responding to the challenges posed by the evolving crypto market, the FCA updated its guidance for cryptoasset firms to ensure compliance with marketing regulations. This includes a transition period for firms to adapt to new rules, which align with those for other high-risk investments

The Financial Conduct Authority (FCA) has unveiled new proposals requiring personal investment firms to maintain adequate capital reserves to cover compensation costs in cases where consumers suffer due to poor financial advisory. This initiative aims to ensure that firms responsible for harmful advice bear the financial consequences, adopting a "polluter pays" principle.

FCA Proposes Mandatory Capital Reserves for Investment Firms

Under these proposals, investment advisors must proactively assess potential redress liabilities, ensuring sufficient capital is set aside for compensation. Firms falling short of the required capital will face automatic asset retention rules, preventing asset disposal.

This measure follows the revelation that the Financial Services Compensation Scheme disbursed nearly £760 million from 2016 to 2022 for substandard advice from failed investment firms, with 95% of this amount originating from just 75 firms.

“We want to see a thriving financial advice market to make sure consumers can access the support they need from financially resilient advice firms,” said Sarah Pritchard, the Executive Director of Markets and International at the FCA. She further emphasized the importance of a resilient financial advice market, noting the unfair burden diligent advisors currently bear due to their failed competitors.

The FCA actively seeks feedback from industry and consumer groups on these proposals, extending the consultation period to 16 weeks and planning extensive industry outreach. The FCA's approach is designed to be proportionate, building on existing capital requirements. About 500 sole traders and unlimited partnerships will be exempt from automatic asset retention rules. Also, firms under prudentially supervised groups with group-wide risk assessments will be excluded.

The FCA plans robust engagement with industry and consumer groups as part of the consultation process, which runs until March 2023. Accompanying the consultation paper, the FCA has issued an infographic summarizing the proposals and communicated expectations to firms regarding existing liabilities.

FCA

Aligning with Broader Strategies

These proposals align with the FCA's consumer investments strategy, aiming to bolster consumer confidence in investment firms. They also resonate with the FCA's three-year strategy focused on reducing harm, setting higher standards, and fostering positive change.

In other regulatory updates, the FCA intensified actions against firms with dormant licenses, a measure to mitigate risks associated with inactive firms misleading consumers. Over 1,100 business lines have been influenced, either through license cancellations or its voluntary surrender by firms.

The FCA's report for the third quarter revealed the review and amendment of over 5,300 financial promotions, predominantly in the retail investments and lending sectors. This action followed the introduction of stricter financial promotion rules for crypto assets.

Responding to the challenges posed by the evolving crypto market, the FCA updated its guidance for cryptoasset firms to ensure compliance with marketing regulations. This includes a transition period for firms to adapt to new rules, which align with those for other high-risk investments

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