The FCA is to force advice firms to hold extra capital to pay for claims, writes New Model Adviser. The headline sums up regulatory plans to move to a ‘polluter pays’ system.
The fundamental element is that advice firms must ‘calculate their potential redress liabilities at an early stage, set aside enough capital to meet them and report potential redress liabilities’.
Some advisers have welcomed this, though the devil surely lies in the details. An old cliché but appropriate here, I think.
Addressing the same story, FTAdviser leads on the FCA view that the reform will hit 5,500 firms, but noting that 625 firms will be subject to some form of exemption.
Interesting to see how this plays out. One such exemption is ‘firms which are part of larger groups subject to higher or comparable standards of capital regulation already’.
The regulator goes on to say - “We are proposing that those who are subject to higher standards [and] differing credential regimes, will be exempt from this.”
The FTA story also notes the planned automatic restriction on firms which do not have enough capital to meet possible redress. This is surely reflective of the FCA having to be so active in intervening to stops funds being withdrawn from adviser firms embroiled in the British Steel Pension Scheme transfers fiasco.
It may actually make sense to quote law firm Reynolds Porter Chamberlain as it gives a strong overview of the proposals – as follows.
“In CP23/24, the FCA proposes that PIFs set aside capital equivalent to at least 28% of the value of potential redress liabilities. However, some PIFs will be required to set aside more capital depending on their complaint history. PIFs are encouraged to calculate their potential redress liabilities at an early stage - this will comprise any unresolved complaints along with prospective redress that could arise from systemic problems or foreseeable harm (a term that readers will recognise as part of the Consumer Duty). PIFs can account for their professional indemnity cover while making these calculations.”
One of RPC’s big questions also seems very pertinent - “How, precisely, will the FCA expect firms to quantify both unresolved redress liabilities (i.e., potential liabilities for complaints that have been made but which are unresolved) and prospective redress liabilities (i.e., potential liabilities for foreseeable harm or systemic problems that may give rise to an obligation to provide redress to a consumer)? This, in our experience, is an extremely difficult and contentious area – both in terms of whether a future liability will arise at all (i.e. should a complaint be upheld / does a systemic issue requiring redress arise) and in terms of what the amount of that liability might be.”
Consultancy OAC warns that the measure will put pressure on advisers advising on defined benefit transfers and may accelerate the trend for advisers to leave that area of advice as FT Adviser reports again.
OAC head of redress solutions Brian Nimmo says: “Polluter Pays reforms will further increase the regulatory and financial burden on advisory firms – both now and in the past – who help those with a DB pension explore whether a transfer is in their best interests,” he said.
In other big regulatory news, implementing the SDR and labelling regime will cost asset managers and advisers significant amounts says law firm Herbert Smith Freehills, as FTAdviser reports.
The reason given – multiple workstreams. I am not convinced the advisory processes will be hugely burdensome though that does depend on the number of funds covered and perhaps the number of ethical and environmental tending clients.
ESG Clarity takes a long look at the proposals and highlights some concerns about the initiative.
This includes some worries about the new fourth label – 'mixed goals' - and the scrapping of the requirement that firms outline a causal link between stewardship activities and asset improvements though some have welcomed that move.
There are concerns from some advisers that ethical client’s concerns have been left out essentially.
Scottish Widows has simplified its adviser sign up process though the move provoked a little cynicism on social media.