PIMFA has raised serious concerns about the Financial Conduct Authority’s (FCA) proposals for personal investment firms (PIFs) to calculate their potential redress liabilities and has called for further engagement with the industry.
While the proposals put forward by the FCA to increase the accountability of firms that have exposure to redress liabilities are welcome in that they are a move towards a ‘polluter pays’ model, which PIMFA has been advocating for, for several years, they however raise significant concerns.
As they currently stand the proposals would see well-run firms holding additional capital for redress that may never be required and paying higher Professional Indemnity (PI) premiums. They would lead to PI providers taking defensive positions against customer claims that might never materialise through additional policy exemptions, and in the worst cases they would lead to firm failures as a result of additional capital allocation requirements that would still leave clients falling on the FSCS. All the while leaving bad actors free to continue to behave in a way in which well-run firms end up paying for their failures.
Under the current proposals firms will find it extremely difficult to assess their potential redress liabilities as these will 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.
The proposals provide no clarity on the regulatory mechanisms that will need to be in place to ensure that calculations are correct and are accurately reported. There is also concern about how the proposals will be supervised and enforced, especially as the FCA does not directly supervise the majority of smaller firms.
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.
But 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.
Moreover, given the FCA is considering moving towards a more comprehensive prudential regime for PIFs, drawing on the experience of introducing the Investment Firms Prudential Regime (IFPR) in January 2022, PIMFA argues the current proposals are premature.
PIMFA is strongly in favour of a review of the PIFs’ prudential regime and moving towards an alignment with MiFID investment firms in a reasonable and proportionate manner.
A reformed prudential regime would provide increased capital/liquidity requirements and improved risk management for PIFs (e.g. provisions for a form of ICARA and wind-down planning) and would address the objectives of this consultation, delivering equivalent outcomes with less complexity, subjectivity, and burden placed on all firms. On this basis, any future review and move towards a more comprehensive prudential regime for PIFs would make many of the proposed rules in this consultation unnecessary and redundant.
PIMFA would therefore prefer clarity on the proposed timing of any future prudential review to reduce the duplication of effort and additional work this would introduce to firms, but of more importance, further discussion with the industry on the merits of these proposals versus moving to a simpler alignment of the PIF prudential regime with MiFID investment firms.
Alexandra Roberts, Head of Regulatory Policy and Compliance at PIMFA, commented: “While the intent of the FCA’s proposals is welcomed, the requirements and process are overly subjective and complex and do not provide sufficient confidence in the effectiveness of how they will be supervised and enforced to achieve their aims.
“It will, therefore, result in a considerable burden, in terms of time and resources, for the diligent and prudent firms while having little to no impact on the bad actors who are knowingly responsible for high redress claims.
“In short, the proposals will impose sweeping and extensive obligations on all 5,000 PIFs to address the actions of 75, which appears unnecessary and disproportionate.
“It would be preferable to consider the proposals to increase the prudential alignment of PIFs with MiFID investment firms instead. This action would resolve some of the issues in relation to redress claims falling onto the FSCS and be a more straightforward and logical solution.”
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