OAC shares concerns around compliance burden in response to FCA consultation on capital deduction for redress for PIFs
Actuarial consultancy OAC has responded to the FCA’s consultation on capital deduction for redress: personal investment firms (CP23/24).
The proposed new regulations, labelled by some as the ‘polluter pays proposals’, seek to help personal investment firms (PIFs) get a better handle on the risks they have and a better understanding of the potential for the amounts of redress they may need to pay in the future. This can only help improve the governance within these firms.
By requiring PIFs to reserve for these liabilities, for many the proposals will introduce a level of resilience into the firms that has not existed to date. Alongside the wider suggested improvements in governance, when viewed as an overall package, the proposals are to be welcomed.
There are significant concerns, though.
We feel that the FCA has underestimated the effort that will be required from PIFs to implement the reforms and the hurdles some may need to overcome. For many years the FCA has recognised that many redress calculations are complex and require the involvement of an actuary.
The proposals contained in CP23/24 add a new layer – an estimate of an underlying complex calculation. If the expectation is that a PIF will be able to do this without advice, we fear that this is somewhat optimistic. Many will need to seek advice from an actuary and will likely need to do so on at least an annual basis. The consultation does not reflect this in its cost-benefit analysis.
PIFs will face significant data issues to be able to estimate the reserves they need to hold. Our experience is that for many PIFs, the data is not readily available in an easily transferable electronic format. The firms will need to undertake an exercise to decide on the data they need to collate and put this into a format that can be used for the calculation of the reserve. PIFs should not underestimate the amount of time this may take.
The reserve that PIFs will be required to hold under the proposals will be volatile in nature. Redress, in essence for many products, is the difference between two large numbers.
Quarterly market movements can lead to large changes in the reserves being proposed. For other entities needing to reserve against future liabilities it is standard practice to add a resilience reserve to help protect it against such risks. The proposals in CP23/24 do not take this approach which could lead to PIFs being exposed to material market-related risks. If the FCA does not look to build in this level of protection in its final rules, PIFs would be well advised to consider doing so themselves to better insulate themselves from the vagaries of the market.
Brian Nimmo, Head of Redress Solutions at OAC, commented: “The reforms are set to embed significant resilience into PIFs but we do have concerns around the level of activity firms will need to undertake to meet these requirements. OAC has developed the tools and modelling required to help PIFs with the data and reserving requirements laid out under these proposals.
“With 30 years history as a specialist provider of redress advice, we can help PIFs navigate the complexity of the new rules. We will be able to provide firms with a report, signed by an actuary and subject to the actuarial profession’s standards, with the calculation of liabilities. The ‘actuarial stamp’ will give firms the confidence that the figures produced are in line with the FCA’s rules.”
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