The Financial Conduct Authority is consulting on the introduction of new capital requirements for personal investment companies that will require these firms to manage their potential redress liabilities more prudently.
This is to reduce the risk that PIFs will not be able to meet any redress liabilities that may arise in the future.
Where PIFs are unable to meet their redress liabilities, consumers can suffer harms if they are unable to recover sums from the PIF and their claims exceed the limits under the Financial Services Compensation Scheme.
The FCA has identified 20,000 consumers that have been affected by this issue over the past few years. Equally, the failure of PIFs to meet their redress liabilities has also led to significant redress liabilities falling on the FSCS – about £760mn between 2016 and 2022 – which are in turn covered through the FSCS levy.
This has led to concerns that “some PIFs” are in essence having to bail out “other PIFs” through the FSCS levy – as 95 per cent of FSCS liabilities were linked to just 75 companies.
In order to remedy this issue, the FCA is proposing that PIFs identify and estimate their “potential redress liabilities” at an earlier stage and then set aside capital for these purposes. The rules will require PIFs to build up their capital base (that is, by preventing dividends/capital reductions) where they do not have sufficient capital to cover their potential redress liabilities.
This reflects a desire from the FCA for the PIF responsible for the liability to cover the costs of any related redress (that is, bad companies will need to be able to bail themselves out). These proposals are aligned to, and help further, a key theme from the FCA that companies should not focus their attention on redress, but should be acting to prevent customer harm emerging at all.
What are the FCA’s proposals?
PIFs include companies that mainly provide advice and arrange deals in retail investment and pension products. Under the rules proposed by the FCA in its consultation paper (CP23/24), there are broadly four new steps that PIFs will need to undertake in order to comply with their prudential requirements.
First, a PIF will need to identify and estimate its potential redress liabilities (taking account of any professional indemnity insurance coverage).
The assessment of any potential redress liabilities will need to include consideration of both unresolved redress liabilities (that is, complaints that the PIF has received but which have not been resolved, but may give rise to a liability) and prospective redress liabilities (that is, foreseeable harms or systemic/recurring problems that are identified from complaints).
The rules do not introduce any new requirements for identifying potential redress liabilities. Instead, it is expected that existing requirements on PIFs, particularly as part of the monitoring and testing obligations under the consumer duty, will ensure that companies appropriately identify their potential redress liabilities.
