Personal investment firms that give bad advice to hold capital for redress

The FCA has announced today proposals to require personal investment firms to set aside capital so that they can cover compensation costs and ensuring the polluter pays when consumers are harmed. 

The proposals would require personal investment firms – often referred to as investment advisers - to calculate their potential redress liabilities at an early stage, set aside enough capital to meet them and report potential redress liabilities to the FCA. Any firm not holding enough capital will be subject to automatic asset retention rules to prevent them from disposing of their assets.  

Sarah Pritchard, Executive Director of Markets and International, at the FCA:  

'We want to see a thriving financial advice market to make sure consumers can access the support they need from financially resilient advice firms that want to do the right thing. Diligent advisers are having to compensate through the levy for the bad advice of their failed competitors. That needs to change. It is important that the polluter pays. 

'We want to hear from industry and consumer groups on our proposals. Please do let us know what you think so that we can reform the way the current framework operates to ensure that those polluting the sector pay.'

The Financial Services Compensation Scheme (FSCS) paid out nearly £760m between 2016 and 2022 for poor advice provided by failed personal investment firms. 95% of this was generated by just 75 firms. 

The proposals seek to ensure that the polluter pays for the redress costs they generate. It will be those who provide bad advice who will be responsible for setting aside enough capital to compensate for it. In turn, the proposals will create a significant incentive for firms to provide good advice in the first place and to right wrongs quickly. This will benefit consumers given the important role investment firms play in the decisions people make for their long-term financial future.  

The proposals are designed to be proportionate, building on existing capital requirements. The measures would exclude around 500 sole traders and unlimited partnerships from the automatic asset retention requirements. Firms that are part of prudentially supervised groups, which assess risk on a group-wide basis, would also be excluded. 

The FCA is keen to hear what industry and other stakeholders think of these proposals. They build on over 250 responses to the FCA’s previous call for input on the Consumer Investments Markets and the Compensation Framework Review. Recognising the importance of getting this right, the FCA is extending its consultation period to 16-weeks. This will be supplemented with an extensive programme of industry outreach. 

The FCA expects to publish the next steps in the joint review of the Advice Guidance Boundary which it is conducting alongside the Government in the coming weeks. The review and today’s announcement support the FCA’s consumer investments strategy which aims to help consumers invest with confidence, with access to the support they need from financially resilient advice firms. They also deliver on all three commitments in the FCA’s 3-year strategy to reduce harm, set higher standards and promote positive change.  

The FCA is planning an extensive programme of outreach to the industry and consumer groups as part of the consultation which runs until 20 March 2024.  

Notes to editors

  1. Read CP23/24: Capital deduction for redress: personal investment firms 
  2. Infographic summarising capital deduction for redress proposals
  3. Personal Investment firms are firms that mainly provide advice and arrange deals in retail investment products and are exempt from the UK’s implementation of the Markets in Financial Instruments Directive (MiFID).
  4. A prudentially supervised group is a banking group supervised by the PRA under the UK CRR, an insurance group supervised by the PRA under Solvency II, or an investment firm group supervised by the FCA under MIFIDPRU. 
  5. Alongside the Consultation Paper, the FCA has written to firms setting out its expectation that they should not seek to avoid their existing liabilities before any new rules are implemented. The FCA will carry out increased supervision of firms and take action where appropriate.
  6. Find out more information about the FCA.