The Financial Conduct Authority’s new ‘polluter pays’ regulations will heap further pressure for firms advising on defined benefit (DB) transfers, actuarial consultancy OAC has warned.
The proposals will require personal investment firms to calculate their potential redress liabilities at an early stage and set aside enough capital to meet them.
In addition, it will also require them to 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.
The regulator said this will ensure the “polluter pays” when consumers are harmed.
However, OAC head of redress solutions Brian Nimmo said the proposed reforms could have a major impact on firms advising on DB transfers and even lead to some exiting the market.
“Polluter Pays reforms will further increase the regulatory and financial burden on advisory firms – both now and in the past – who help those with a DB pension explore whether a transfer is in their best interests,” he said.
“Firms will have to assess the risk in their book before calculating a redress value on that risk which is likely to be an extremely tricky exercise.
“It may see an acceleration of the trend for advice firms to leave the market as they look to limit the capital they have to hold against future redress claims.
“Firms should be talking to their advisers to explore their capital requirements to get ahead of the game if these proposals are implemented.”
However, other firms have welcomed the proposed changes, which the FCA is currently consulting on.
Quilter chief executive Steven Levin said the company is “fully supportive” of the polluter pays model.
“It means that bad actors who have caused harm, or threatening to harm consumer outcomes will be penalised for their failings,” he said.
Meanwhile, the Lang Cat director of public affairs Tom McPhail said the proposals will be welcomed by the many “well-run” advisory firms who end up having to pay the costs of the “irresponsible actions” of a few bad actors in the sector.
The FCA will publish its response to the consultation feedback in the second half of 2024 and expect to enforce the new rules in the first six months of 2025.
It has published a Dear CEO letter alongside this consultation, reminding firms they must not seek to avoid potential redress liabilities.
The theory of polluter pays sounds all well and good, but frankly this is what we expect from regulation and PI already. The outcome to all firms is theoretically lower PI costs and regulatory burdens… I don’t see that happening in the real world do you?
Some progress after so many years. Of course the companies dealing with the high risk should have to cover the liabilities and not foist them on the rest of us doing “boring stuff”. it needs to move to the unregulated investments and make sure those are included.
The FCA, FSA, PIA etc etc has plenty of it’s own polluting. Where is the redress for those misdemeaners then?
What’s PII for then? If it isn’t up to the job then that is what needs looking into and rectifying instead of burdening advisers even more. Anyway, if you look at it logically it points yet again to an inept regulator. Surely it is their job to spot poor advice before it does harm instead of forever shutting the stable door once the horse is miles away.
Provided any advice to transfer meets the FCA’s published current suitability criteria and the FCA doesn’t subsequently move the goalposts, applying new criteria retrospectively, PI insurers shouldn’t need to withdraw the cover in place at the time that that advice was given. Subject to this, it shouldn’t be necessary for firms to hold any more capital than the claims excess on their PII policy for each case (or perhaps secure supplementary cover just for that).
What the FCA is proposing is that ALL such advice, one way or another, will be found after the event to have been defective and it assumes that no PII cover will be in place when this is decreed.
What about the scheme member within ten years of his NRA with, say, a heart condition (that he declared to his adviser), who was advised not to transfer but who then dies of a heart attack and his dependents receive significantly lower death benefits than if he’d transferred? His dependents may well raise a complaint against the adviser. It’d be a case of the adviser being damned for having recommended transferring and damned if he didn’t ~ unless, of course, he insisted on the client securing a full medical report on his life expectancy, which would increase costs and slow everything down.
Advisers, however experienced, ethical and impartial, will just stop even trying to provide this type of advice, unless the member is very close to NRA and in dire ill health.
Not all DB transfers are bad (many may well be quite the opposite), but the position of the FCA seems to be that they are.
How do you calculate the potential liability for correct advice?
How do you calculate the potential liability for bad advice before it is known?
How often does it need to be calculated?
If a DB transfer advice has passed the 6 years, is that then removed from the liabilities?
Do advisers and insurers insist that any DB Transfer client requires independent legal advice and or a meeting with a regulatory body to clarify understanding and the six-year rule before transacting?
Will the regulatory failings be reviewed, and new legislation passed, requiring their rules must be agreed and clarified before advice is provided, so all parties understand before transacting, so we don’t have hindsight regulatory blame. This is why PI fails, as they just cannot calculate the liabilities.
Whilst a good idea, just like the current system, unless the underlying issues are resolved it will fail.
I agree that capital adequacy should be held in a ring-fenced fund, held by a third party, built up over the lifetime of an adviser’s career. A percentage of turnover should be placed in the fund, not just for DB Transfers, but for all advice. This could then be returned as the liability runs off in retirement if there are no claims. It should be an Individual fund in the advisers name so bad adviser could easily be identified. It would over time reduce the need for companies to carry high PI and offer a cost saving to the industry.
This needs very careful thought by the FCA. It would be nice, for once, if they actually take time to listen to firms concerns and not do their usual bulldozing through what they’ve already decided upon.
There is a risk they’ll calculate some of what might need holding in reserve by looking at potential claims going to FOS. The problem with this is the massive issue of Claims Management Companies completely making up a complaint against a firm (because they have nothing to lose), and with 100% of those complaints ending up at FOS.
Some firms are paying out £1000’s in FOS fees as a result of this, even without a single successful claim. CMC’s should at least have to pay the £750 FOS fee per case if they lose the case. But also, firms should not be penalised and be asked to hold greater reserves as a result of the ambulance chasers.
If the polluter pays, then why isn’t the FCA paying up for Woodford, Connaught, Blue Gate and many many more?
Regulatory failure is “polluting the market”.