Pimfa has raised "significant" concerns over the Financial Conduct Authority’s capital deduction for redress plans.
The trade association has called for further engagement with the industry in regard to the FCA’s proposals for personal investment firms to calculate their potential redress liabilities.
In November 2023, the regulator announced personal investment firms would need to set aside capital so that they could cover compensation costs for bad advice.
The proposals aimed to ensure that the polluter pays for the redress costs they generate which Pimfa welcomed but also raised a number of “significant” concerns about.
It said the proposals would see well-run firms holding additional capital for redress that may never be required and paying higher professional indemnity (PI) premiums.
This would lead to PI providers taking “defensive positions” against customer claims which may never materialise through additional policy exemptions.
Pimfa said in the worst cases this would lead to firm failures as a result of additional capital allocation requirements that would still leave clients falling on the FSCS, while leaving “bad actors free to continue to behave in a way in which well-run firms end up paying for their failures”.
It also pointed out under the current proposals firms will find it “extremely difficult” to assess their liabilities suggesting these would be “subjective and open to interpretation”.
“Any assessment will amount to firms sticking their finger in the air and guessing at what their liability for redress may be. It may be entirely possible that a firm makes a capital allocation for redress for something where no complaint ever arises,” Pimfa added.
Little clarity
The association also said the proposals provide no clarity on the regulatory mechanisms that would need to be in place to make sure calculations are correct and accurately reported.
It also had concerns about how the proposals would be supervised and enforced pointing out the FCA does not directly supervise the majority of smaller firms.
Pimfa said: “The proposals require firms to do their own calculations and self-reporting and make a reasonable estimate of the amount of funds they would need to provide in the form of redress to each customer if a liability crystallised.
“While well-run firms will carry out this exercise diligently, spending time and resources to make an accurate assessment, there is serious concern that the ‘bad actors’ will not carry out the calculations correctly or, most likely, simply ignore them.
“Ultimately this will leave the ‘good actors’ continuing to pay for the poor behaviour of a minority of firms instead of reinvesting it into developing their own businesses.”
The trade association said it was “strongly in favour” of a review into the PIFs’ prudential regime and moving towards an alignment with Mifid investment firms in a “reasonable and proportionate manner”.
