Reforms could weigh down past and present advisory firms in the DB transfer market
New proposals by the Financial Conduct Authority (FCA) will require personal investment firms to set aside capital so that they can cover compensation costs and ensure the ‘polluter pays’ when consumers are harmed.
The FCA said it would require personal investment firms – often referred to as investment advisers - to calculate their potential redress liabilities at an early stage, set aside enough capital to meet them and report potential redress liabilities.
However, the plans have been criticised for posing further issues for firms advising on defined benefit (DB) transfers.
Actuarial consultancy OAC, which is part of the Broadstone Group, said the proposals will mean any firm not holding enough capital will be subject to automatic asset retention rules to prevent them from disposing of their assets.
Brian Nimmo, head of redress solutions at OAC, said the reforms could have a major impact on firms advising on DB transfers.
He said: “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.
“Firms will have to assess the risk in their book before calculating a redress value on that risk which is likely to be an extremely tricky exercise. It may see an acceleration of the trend for advice firms to leave the market as they look to limit the capital they have to hold against future redress claims.
“Firms should be talking to their advisers to explore their capital requirements to get ahead of the game if these proposals are implemented.”
This comes as the Financial Services Compensation Scheme (FSCS) paid out nearly £760m between 2016 and 2022 for poor advice provided by failed personal investment firms. A whopping 95% of this was generated by just 75 firms.
The proposals are designed to be proportionate, building on existing capital requirements. The measures would exclude around 500 sole traders and unlimited partnerships from the automatic asset retention requirements. Firms that are part of prudentially supervised groups, which assess risk on a group-wide basis, would also be excluded.
Sarah Pritchard, executive director of markets and international at the FCA, said: “We want to see a thriving financial advice market to make sure consumers can access the support they need from financially resilient advice firms that want to do the right thing. 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.”
The FCA has extended its consultation period to 16 weeks and expects to publish the next steps in the joint review of the Advice Guidance Boundary, which it is conducting alongside the government in the coming weeks.
