In the last eight years, Personal Investment Firms (PIFs) exiting the market have left nearly £760 million in FSCS costs. A whopping 95% of that amount was generated by just 75 failed businesses.

The FCA has decided it is time PIFs were more prudent and put capital aside to safeguard against potential liabilities. As a result, it released a consultation paper at the end of November outlining its proposed guidance. This was backed up by a Dear CEO letter to affected firms, highlighting the importance of providing feedback.

So keen is the regulator to hear what PIFs think, it has extended the normal consultation period to 16 weeks, ending on March 20.

The proposals are designed to be proportionate and target those most likely to cause redress by bringing greater consistency to how PIFs measure and account for potential liabilities, which closely aligns with the principles of Consumer Duty. If redress cannot be covered by capital, you will have to set aside assets instead.

Will you be affected by the proposals?

PIFs are defined as firms that mainly provide advice and arrange deals in retail investment and pension products. They are often referred to as investment advisers.

There are approximately 5,000 PIFs authorised in the UK today, but new market entrants would also be included in the proposals. Firms that are subject to group supervision by the PRA and operate a risk assessment process under the CRR or SII would be exempt, although they would need to inform the FCA that they wished to make use of the exemption.

Sole traders or unlimited partnerships involving more than one natural person would also be exempt, as would firms that are subject to an insolvency order, creditors’ voluntary liquidation or individual asset retention requirements.

Quantifying potential redress

PIFs need to allow for ‘unresolved redress liabilities’ (instances where you have received but not resolved a complaint) and ‘prospective redress liabilities.’ These are circumstances in which you have identified foreseeable harm that could mean providing redress to a customer.

The FCA expects it will be easy enough to identify these liabilities, as requirements already exist within the complaint handling process and under Consumer Duty to monitor your business and proactively rectify harm.

If you are responding to a complaint and have determined no redress is due, the FCA expects a PIF to wait six months, until the referral period to the Ombudsman Service has expired, before releasing the capital held back under unresolved redress liabilities. It is possible that six months will not be sufficient due to FOS backlogs.

The FCA states it does not think PIFs will need additional capital in the long term or indefinitely, because they should already be investigating and resolving potential redress liabilities promptly. There is a clear expectation by the FCA that firms should be undertaking RCA on all complaints received to identify common failings and liabilities. This point also feeds well into Consumer Duty obligations.

Setting assets aside

Any PIF that is unable to raise the minimum capital requirements, after the deduction for redress has been applied, will be subject to an asset retention requirement.

Where applicable, this would prevent you from undertaking transactions that are ‘not in the ordinary course of business’ – guidance about what qualifies as such is to come.

To have an asset retention lifted, PIFs will need to notify the FCA once they are able to meet the minimum capital requirements and they should be able to provide evidence if requested. It will then be automatically rescinded within 20 business days, unless the regulator asks for further information or informs the firm it does not agree with its findings. We can expect the FCA will seek such additional information in most cases.

The pros and cons

If the proposals become regulation in their current form, they should help more consumers receive redress from firms, rather than the FSCS. This will mean they receive money earlier and in full, if their claim exceeds the £85,000 cap.

However, the proposals are likely to produce some less positive outcomes as well. One suggestion is to increase the minimum capital adequacy requirement for PIFs to £75,000, in line with MIFIDPRU firms. Despite carrying out similar activities to former exempt-CAD firms, PIFs currently have lower capital requirements, although the regulator’s analysis suggests most hold more than the rules stipulate. An increase of £55,000 would mean about half of firms would need to raise additional capital.

The FCA expects a small number of PIFs, who are unable to find the funds needed to cover their liabilities, to exit the market and for FSCS compensation costs to rise in the short term, due to an increase in claims.

Improving firms’ practises and financial risk management should make it easier for PII providers to operate in the longer term. But what about the short term? Could increased insurance renewals see more firms exiting the market sooner than expected? Quite surprisingly, the regulator doesn’t think so. It announced in early February that it doesn’t consider regulatory intervention appropriate after concerns were raised by the various panels it uses to inform strategy.

The FCA believes the proposals won’t materially reduce consumers’ access to advice either, but they may cause some firms to re-evaluate the products and services they offer. That could make it more difficult or more expensive for people to find the support they need.

Ultimately, if these steps incentivise firms to provide better outcomes and resolve harm faster when it does occur, the consumer will benefit. In the longer term, it is hoped ensuring the ‘polluter’ pays redress directly, will help lower the FSCS levies firms pay, so you will benefit too.

If you are a PIF wanting to know more about the FCA’s proposals and how to participate in the consultation, don’t hesitate to contact us on (0161) 521 8641 or email:

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