The FCA has provided an update on its “polluter pays” proposals – outlining what it expects firms to do and what action it will take against those that fail to comply.
The regulator said firms should take “reasonable and verifiable steps” to ensure any potential and actual redress liabilities have been considered, provisioned for and addressed.
This includes ensuring that the transferring firm has adequate run-off cover and/or capital put aside in escrow, and that sale proceeds and/or assets have been ring-fenced.
It also includes assessing the risk of the advice given through robust files reviews and the ongoing review of past advice.
The regulator said firms should agree on the transfer of liabilities alongside the customers or assets to ensure good customer outcomes in line with the Consumer Duty.
Authorised firms should also submit a SUP 15 notification to inform the FCA of anything it ought to be made aware of in good time before transactions take place.
In addition, they must seek FCA approval, where required, prior to any change in control taking place.
In line with the Duty, firms must act in good faith, avoid causing foreseeable harm, and enable and support retail customers to pursue their financial objectives.
The regulator also said it expect firms to clearly outline why it took a particular course of action in relation to redress liabilities and how it considered customers’ interests in taking those decisions/actions.
The FCA warned it will “apply more scrutiny where we identify a greater risk of polluter behaviour”.
If it does not consider that the risks have been adequately mitigated, it warned it may refuse the application.
It added that where it suspects, or has evidence of, potential or actual redress liabilities, supervision may engage with the firm to complete a holistic review of its activities and business model with a view to it putting adequate provisions in place.
“Where we believe firms have not taken sufficient steps to avoid polluter behaviour, we may ask them to take further action,” the FCA goes on to say.
This may include taking out professional indemnity insurance and/or holding additional capital to cover potential future claims.
It may also seeking assurance from third parties involved in business transfer scenarios and review high-risk business and paying redress where necessary.
Brian Nimmo, head of redress at independent financial services consultancy Broadstone, said advisers should “begin preparing immediately”.
He added that they “cannot say they haven’t been warned”.
Nimmo said: “The latest update from the FCA on polluter pays regulations is another shot across the bows to ensure firms are making the requisite preparations when it comes to setting aside capital for potential and actual redress liabilities.
“There is a clear requirement for firms to have adequate financial resources to be able to provide redress, which means assessing the risk in their book to calculate a redress value on that risk.
“This is likely to be a very challenging exercise, so many firms should begin planning now and considering the partners and expert advice they may need to comply with the regulations.”
Polluter behaviour occurs when a firm or individual takes steps that leave behind potential or actual redress liabilities generated in the course of their regulated activities.
Consumers become reliant on the FSCS for redress, but for investment claims the cap is set at £85,000.
That means, in some cases, consumers’ losses exceed FSCS limits, which often means they may not receive the full amount owed.
The FCA said this “undermines trust in the financial system and the reputation of the industry”.
The other issue is the rising cost of the FSCS levy, which impacts firms across the market.
The regulator said polluter behaviour “means the entire industry pays for the poor conduct of a small group of firms and that’s not fair on those firms that do play by the rules”.
Poor practices have meant that the FSCS has paid out £760m in redress for personal investment firms that left the market between 2016 and 2022, affecting 20,000 consumers.
A third of these liabilities (around £224m) were paid by the FSCS in the two years after the firm exited.
“In line with the Duty, firms must act in good faith…” I’m yet to have an interaction with the FCA in which they act in good faith.
If the number of firms engaged in poor conduct is so small, why can’t the FCA identify them at an early stage (or act on the whistle blows from third parties that it claims to be so keen to encourage), then swoop in and put a stop to it before it develops into a costly train wreck for everybody else?
In combination with its pernicious denial of any longstop against stale complaints, the FCA’s clear intention seems to be that advisers shall carry to their graves potential liability for everything they ever did throughout their working lives. People at the FCA, of course, carry no personal liability for anything. As pointed out several years ago by Hector Sants, were they required to, they’d all leave.
So ….
Lifetime liability is still the chain and shackle that binds us, holding capital and insurance that will not pay out knowing what was advised compliantly yesterday, will hold no security for tomorrow in a ever changing environment, regularly checking rule and guidance changes because the FCA are ignorant to the industry they regulate and change their minds like the wind.
Bound to the end of your days, a lifetime of servitude before the mast left to rot on the Queen Ann’s Revenge that is financial services !!
No even allowed to enjoy your retirement.
No mention of mandatory novation agreements ? Nah.. that would be too simple.
Well. That’s a huge bill for the FCA then which is an utter failure. That a failure by commission not omission. All of their interventions have failed and destroyed wealth. And what are they doing about the wealth destruction of unsound money, in which they are complicit?
It seems the only song the regulator knows is ” Compensation, compensation, Compensation” With all this publicity are you surprised that the public take a jaundiced view of financial services.
Errm…
When I was a lead asset obscurer for Lloyds Names in the ’90s & early 2000’s, many bought personal ‘reinsurance to close’. This a quite normal method of shedding liability to a third party based upon the risks presented, claims history, and (!) a way of gaining extra premium for some risks, at the very least, which reinsurers already carried.
The most common big ticket captive cover is reinsuring your own, up front cover captive, or using a fronting company – yes it sounds very ’30s USA like racketeering but, ahem, very true nonetheless… Aviva is amongst the biggest Fronting Co.s here – surely financial services can work this out?
These cover very long term liabilities – pollution, RTAs, Employer Liability, …. Of course, the natural prime mover for this to provide an industry wide scheme ought to be a responsible and active regulator… Ah, now I see the problems…
Of course, it could be argued that if only a small number of firms are risky, yet with big libilities, this is a failure of regulation itself… What! Teflon coatings really arrived under Blair & Brown…
Have continued since, and have massively surfaced in the last six months (again)…
BtW… most banks now underwrite their issues, especially third party/covered ones, through their own captive. Usually one in a different territory to the instrument issuing one… gross roll up upon excess premiums with no pesky HMRC eyes lives long in Guernsey & Aruba… I’m not sure even Hugh Lofting found the latter!