UK regulator to require from investment advisers to set aside buffer for redress claims

MNK Risk Consulting > Regulatory Developments > UK regulator to require from investment advisers to set aside buffer for redress claims

UK Investment advisers will be soon required by Financial Conduct Authority to set aside money to cover the cost of potential redress schemes that would ensure the “polluter pays” when consumers are harmed. The Financial Conduct Authority (FCA) wants the financial advice market to make sure consumers can access the support they need from financially resilient advice firms.

Reasoning for this new requirement: “Diligent advisers are having to compensate through the levy for the bad advice of their failed competitors. That needs to change. It is important that the polluter pays,” an FCA representative said. At present, significant redress liabilities in the UK fall to the Financial Services Compensation Scheme, which paid out almost £760mn between 2016 and 2022 for poor advice provided by personal investment companies that had subsequently failed. Some 95% of the payouts were generated by about 75 of the almost 5,000 companies in the market. The redress is raised through a levy paid by regulated advice companies; those in their first year of authorisation are exempt.

The draft rules would require personal investment companies to calculate the amount needed for their potential redress liabilities and set aside adequate capital. If a company’s capital dips below its potential redress costs, it would face a range of restrictions on reducing the value of its assets.

The FCA, with this new requirement, also wants to cut compensation wait times. Currently, they average nine years between the point of misconduct and redress being paid out. The groups being targeted by the FCA mainly provide advice and arrange deals in retail investment products and are exempt from MiFID regulation, which dictates a minimum capital requirement of £750,000. Personal advice companies are required to hold £20,000 or 5-10 percent of their annual investment business income, whichever is higher. The average claim for investments at present is about £26,000, and the compensation limit is £85,000. The FCA estimated that one-third of the UK investment advisory service providers’ market would have to set aside capital, with only 2% subject to asset retention requirements. The estimated annual compliance cost for smallercompanies is £1,000.

*Based on information sourced from an FT article published on 30.11.2023