Around 5,500 firms will be affected by the Financial Conduct Authority’s “polluter pays” proposed framework, the authority has estimated.
Following the announcement of the framework earlier today, the FCA specified that investment intermediaries would be affected under the proposals.
More specifically, firms which are in scope are “those that mainly provide advice and arrange deals and retail investment products and are exempt from the UK’s interpretation of Mifid”.
It added that there are about 5,500 of these firms that “should be reading” the proposals, but certain firms would experience some level of exemption.
One such example were firms which were part of larger groups which were subject to higher or comparable standards of capital regulation already.
“If you read the consultation in detail we are proposing that those who are subject to higher standards, differing credential regimes, will be exempt from this,” the FCA explained.
Additionally, the authority also proposed that around 500 sole traders and unlimited partnerships would be excluded from the asset retention rules.
This is because it doesn’t think it would be appropriate to apply those rules automatically to the personal assets of these firms.
The FCA explained that while the 5,500 firms need to read the consultation paper, there’s about 625 firms that could qualify for some level of exemption.
But the regulator cautioned: “It’s not necessarily automatic that all firms are exempt and it’s right that you read the [consultation paper]”.
Step-by-step breakdown
The FCA said its framework could be broken down into four key steps.
The first step is that firms should be able to identify where they need to pay redress in the future, which can be done by monitoring customer outcomes under consumer duty.
Secondly, where firms do identify potential redress liabilities, the FCA wants them to quantify those liabilities, something for which the proposed rules set up a prescribed way to do.
The authority explained that firms will have to estimate the funds needed to pay redress for unresolved complaints or future redress from recurring or systemic issues and foreseeable harm.
This will be calculated for each impacted customer to form the firms potential redress liabilities.
Firms will then be allowed to offset this by factoring in professional indemnity insurance and applying a prescribed probability factor which recognises that not all complaints are upheld or issues once investigated lead to a redress payment.
Step three is for firms to set aside the capital to meet these potential redress liabilities, with this deduction intended to be built into the regulatory return on the firm's capital resources.
The last step outlined by the authority was a proposed automatic asset restriction for the firms that do not have enough capital to redress liabilities.
This means that firms can only make payments in the ordinary course of business.
As a result, the FCA hopes that this will cause them to build up their capital levels over a period of time and prevent them from dissipating assets to avoid those liabilities.
