At the end of last year, the Financial Conduct Authority published a set of proposals on capital requirements for personal investment firms (PIFs).
Key to the regulator’s analysis is the insight that only around 1.5% of firms (75 firms) create 95% of Financial Services Compensation Scheme (FSCS) claims – almost £720m.
The FCA’s aim is to create a ‘polluter pays’ environment, in which the firms that unload the most claims on the FSCS (and, ultimately, fellow firms that pay the FSCS levy) must retain capital to ensure they cannot fail without providing for their compensation costs.
This capital should cover complaints a firm is actively dealing with and other systemic issues affecting it.
Only around 1.5% of firms (75 firms) create 95% of FSCS claims – almost £720m
The FCA estimates a very low proportion of advice firms – around 2% – will have to retain additional capital under the new rules.
The proposals will have risks and benefits. There are clear advantages for consumers and the vast majority of advice firms in tackling the 1-2% that create most of the demands on the FSCS. However, the proposals will generate data-gathering requirements for all firms, comparable with the work generated for the Consumer Duty – although the FCA hopes to gather as much data as possible through existing requirements.
If successful, the FCA’s work could achieve its goal of making the ‘polluter pay’.
At the other end of the scale, the new regime could end up with well-run firms spending more time and money justifying why they are not in the 2% of firms that need to set aside more capital, while those that cause the problems remain undercapitalised until they are ordered to add to their reserves – which may be too late to reduce the burden on the FSCS.
There is a welcome acknowledgement the compulsory PII market does not always work in the way it should
There is also a welcome acknowledgement in the paper that the compulsory professional indemnity insurance (PII) market does not always work in the way it should.
The FCA has said: “In some limited circumstances, a PIF may find it difficult to get PII cover due to the activities it undertakes or its past conduct. As an alternative approach, we could consider allowing PIFs in these circumstances to hold materially higher levels of capital or a ‘ring-fenced’ amount of core liquid assets equivalent to the corresponding aggregate limit of indemnity under a PII policy with automatic reinstatements.”
This proposal is similar to the approach taken by the Financial Services Authority in the early 2000s, when it allowed advisers to hold capital instead of PII during a very hard market. This was dealt with on a case-by-case basis, and the FCA director responsible David Kenmir told Money Marketing at the time:
It would be a significant and tangible benefit of Brexit if the FCA found a way to use similar discretion in future
“We could have done that in a very different way by saying ‘Get more PI or you’re out’ but we probably would have had to delicense thousands of IFAs, which we did not think was the right outcome.”
At the time, the FCA had more leeway to act on PII because it was not yet restricted by EU rules on compulsory insurance. It would be a significant and tangible benefit of Brexit if the FCA found a way to use similar discretion in future.
Matthew Connell is director of policy and public affairs at the Personal Finance Society
Surely a cellular based captive would be the answer.
A rent a core capital, with highest rents upon those who claimed the most…any member would have to put up minimum capital – or own re insurance – more claims more capital…
If the industry was run right, then re insurers would be puched further back from claims and premiums would fall accordingly, or wider cover offered.
As MM is full of scripts writing with services to sell… may I, ahem, put myself forward to organize such a structure…
(Govt, should have done something like this for all the victims of Grenfell Tower insurance fallout).
Sounds like the deck chairs being rearranged ? lets do what we have done before but from a different angle ..
Its disappointing the PFS, seem to have the same affliction as the FCA believing blind faith is better than positive change ?
Could, Should, and In the long run …key words used in recent times, for this and the consumer duty…
I not sure about you, but if your trying to sell an idea, a concept, at least have conviction in the premise yourself to inspire confidence.
£720,000,000 divided by 75 (firms) = £960,000 per firm. Just how much capital does the FCA expect firms to accumulate (and presumably keep ringfenced from their normal cash reserves) to avoid any of their possible future liabilities from falling to the FSCS? It sounds like yet another regulatory wet dream that hasn’t a hope in hell of ever working.
A better idea might be for the FCA to:-
1. ask what types of business firms are doing (and/or have done in the past),
2. demand proof of current PII relating to any type of business perceived to be high risk and
3. home in on those firms with potential liabilities at risk of falling to the FSCS (because they don’t hold relevant PII).
This would be a prime example of proportionate and appropriately targeted regulation, as enshrined in Statute (which means it’s the LAW) but from which the FCA has resolutely ignored from the word go.
The foreword to the code says that our expectation (a word beloved by the FCA) is that as regulators integrate the Code’s standards into their regulatory culture and processes, they will become more efficient and effective in their work. They will [be able to] use their resources in a way that gets the most value out of the effort that they make, whilst delivering significant benefits to low risk and compliant businesses through better-focused inspection activity, increased use of advice for businesses, and lower compliance costs.
What say you FCA?
Very well put!
In a captive scenario… the (cash/call) capital requirement could be much reduced with re insurance, or relevant deductibles to match the work being undertaken, and, ultimately, the claims.