On November 29 2023, the Financial Conduct Authority announced proposals to require personal investment firms, otherwise known as investment advisers, to set aside capital to cover compensation costs.
The proposals would require firms to calculate the cost of rectifying mistakes in the event of a customer being adversely impacted (known as redress liabilities), set aside enough capital to meet these costs, and report these incidences, where compensation is required, to the FCA.
The proposed changes are part of the FCA’s drive to create good consumer outcomes and ensure that the fair treatment of customers is central to corporate culture.
If this phrase sounds familiar, it should, as it is a key element of the watchdog’s consumer duty, which goes hand in hand with these proposals as part of the regulator’s wider consumer investment strategy.
Where the consumer duty addresses the adequacy of products, these proposals assess the adequacy of advice as part of the FCA’s aim to ensure good outcomes are being provided at every point of the retail investment value chain.
Advisers are no doubt pouring over the detail of the FCA’s suggested capital reforms, but to minimise concern about more regulatory change coming down the tracks, we recommend taking into account the following five considerations as firms prepare to respond to the proposals and, ultimately, manage implementation.
1. Read the consultation paper and Dear CEO letter
It sounds simple, but getting into the weeds of the changes to the prudential regime will act as a reminder to personal investment firms of their existing responsibilities, as well as explain the approach the FCA is taking to ensure consumers are treated fairly.
These proposals are a high priority for the regulator and, once implemented, will work in conjunction with other reforms to the advisory market, including the consumer duty and the advice guidance boundary review.
It is therefore paramount these proposals are put in front of the right internal stakeholders to ensure they understand the FCA’s direction of travel and the standards they, and the wider business, will have to adhere to.
2. Assess the scope to be on the front foot
The industry is working with draft proposals at this point in time, but complacency now will only cause difficulties down the line when the regulatory reforms come into force.
Firms should therefore be well prepared and take the time now to conduct high-level analysis to determine how the proposals apply to the business and if any exemptions can be afforded.
The firms in scope mainly provide advice and arrange deals in retail investment products and are exempt from Mifid regulation – although the FCA estimates that in reality only one-third of the market would have to set aside capital.
However, it is worth noting that the FCA is already monitoring firms that are applying to cancel or take new permissions in an attempt to work around these new rules.
