The FCA has issued new guidance on how firms should comply with its 'polluter pays' requirements, which crack down on firms trying to avoid liabilities while still benefiting from the assets of the business.
In the event firms need to compensate customers when they provide poor advice, products, or services, the regulator says firms need to "plan ahead, revisit and monitor the consumer outcomes and make adequate financial provisions for potential and actual liabilities".
The FCA says it is increasingly seeing firms trying to avoid potential or actual liabilities whilst still benefiting from the assets of the business, which it calls ‘polluting behaviour’.
The FCA says: "A firm which causes the market to pay for its mistakes through the Financial Services Compensation Scheme (FSCS) levy or shifts that loss onto the customers isn't playing fair and damages the reputation of the market."
The FCA's expectations for firms
In an update published this week, the regulator stressed that firms "must not seek to avoid potential or actual redress liabilities".
It expects firms to ensure they and the appointed representatives they oversee adequately plan and provision for potential and actual redress liabilities, including holding adequate financial resources to meet them.
The FCA also requires firms to notify it immediately when they become aware or have information that reasonably suggests any of the following may have happened (or could happen in the future):
- A firm does not have adequate resources to provide potential redress.
- A firm intends to sell or transfer its client bank, and the sale could have an impact on the firm’s risk profile, value or resources.
- A firm has potential redress liabilities and wants to offer consumers less redress than they might be due.
The FCA has also provided information for firms before they apply to cancel their authorisation, saying firms must identify and meet any potential liabilities before it will cancel their authorisation. The regulator may use past business reviews and deed polls to ensure liabilities to consumers are identified and met.
Where firms are unable to meet their liabilities and accountable individuals seek to restructure or move to another firm leaving the liabilities behind, the FCA says it will "seriously question their fitness and propriety to hold a role that requires FCA approval".
What firms should do
The FCA says firms should take "reasonable and verifiable steps" to ensure any potential and actual redress liabilities have been considered, provisioned for and addressed, the transferring firm has adequate run-off cover and/or capital put aside in escrow, and that sale proceeds and/or assets have been ring-fenced.
It added that firms should assess the risk of the advice given through "robust file reviews and ongoing review of past advice".
Firms should also ensure a customer contact exercise is completed, giving clear and timely communications to inform customers of the firm’s intentions to sell the client bank and the potential impacts and customers' rights to claim in respect of past advice, particularly where the transferring entity is proposing to dissolve.
The FCA's update also outlines that firms should:
- Obtain a fair, independent valuation for client banks to establish a fair market value and avoid or declare any potential conflicts of interest to ensure transparency in the sale process.
- Agree on the transfer of liabilities alongside the customers or assets to ensure good customer outcomes in line with the Consumer Duty - the FCA says good firms often use a deed poll to do this.
- Submit a SUP 15 notification (authorised firms only) to inform the FCA of anything it should be made aware of in good time before transactions take place (for example, the intention to sell or purchase the client bank, transfer assets or restructure).
- Seek FCA approval where required, prior to any change in control taking place. Failure to do so is a criminal offence under FSMA s191F.
- Submit a robust wind-down plan (where applicable), tailored to the firm’s business model/size/risk exposure and prepared in line with the Wind-down Planning Guide to ensure minimal adverse effect on customers, counterparties, or the wider market.
- Ensure you keep up to date with any applicable guidance or relevant FCA communications (like finalised guidance publications and portfolio letters) about putting adequate provisions in place.
- Ensure candidates for Senior Manager roles have the relevant skills and experience required to run the firm effectively and in a compliant manner, including looking at their regulatory history. If a candidate proposes to bring clients with them, the FCA expects authorised firms to check what impact this might have on those customers and secure good outcomes. Where firms/individuals apply at the gateway for authorisation, their Form As and controller forms must include all relevant disclosures.
Responsibility for advice, products and services
The FCA said it "know(s) that some firms and individuals apply to be authorised after they have provided services, such as financial advice, at other firms". Where applicants are confident in the quality of historic advice, they will often enter into a deed poll to accept responsibility for past advice given and bring that liability into the new firm.
The regulator added: "This situation doesn’t just arise with new startups. We also see deed polls being used where there is potential for an individual or firm to receive a benefit from, or avoid a loss associated with, another firm. For example, where an appointed representative who owns their client bank is moving to another principal firm. Under a deed poll, the new firm that receives the transferred business agrees to take responsibility for past services.
"Ultimately, if an applicant does not take appropriate steps to ensure customers interests are protected, we may refuse the application. Where we suspect or have evidence of potential or actual redress liabilities, Supervision may engage with the firm to complete a holistic review of the firm’s activities and business model with a view to the firm putting adequate provisions in place."
In conclusion, the FCA says it encourages regulated firms, financial advisers, compliance firms and other financial advice organisations to:
- Speak out and report any firm or individual suspected of providing poor advice, products or services, or attempting to phoenix to avoid their liabilities to consumers.
- Be open and transparent with the FCA when it requests regulatory references.
- Contact the FCA immediately if you have had an award made against you by the Financial Ombudsman Service and are worried you will not be able to provide the redress.
- Ensure you are carrying out thorough due diligence and compliance checks on all advisers you recruit to ensure no poor advice has been given previously.
- Ensure all advice is compliant and ensure you make consumers fully aware of the type of investment they are making.
