Financial watchdog to require ‘polluting’ firms to cover compensation costs
The UK’s financial watchdog has announced measures to require investment advisers to cover compensation costs when they harm consumers.
The Financial Conduct Authority (FCA) said the proposals would “ensure the polluter pays” by mandating personal investment firms to calculate potential redress liabilities, set aside funds to cover them and report potential liabilities to the regulator.
In an effort to make the proposals “proportionate,” around 500 sole traders and unlimited partnerships, as well as firms that are part of prudentially supervised groups, would be excluded from the requirements.
The FCA said it plans to consult with the industry and consumer groups over the proposals until March 2024.
Sarah Pritchard, the FCA’s executive director of markets and international said: “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 for poor advice by failed personal investment firms from 2016 to 2022, with 95 per cent of this cost coming from just 75 firms.
The FCA argued that the proposals would give an incentive to firms to provide good advice and fix mistakes quickly, which in turn would benefit consumers who use these companies to make important financial decisions.