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‘Twas the 2nd December 2022 and Maddie found herself in the lucky position of writing her second consecutive Eclipse which included the statement ‘I wish the FCA didn’t leave all of their homework until December, but alas’.

Jump forward a year (minus one day) and the sentiment remains. With it finally being the festive season, I’m going to change the narrative to ‘The FCA are the gift that keeps on giving’ with the regulator not delivering one but TWO pretty major papers this week. One full Policy Statement, the eagerly anticipated ‘PS23/16 Sustainability Disclosure Rules (SDR) and investment labels’, and a Consultation Paper with the catchy name ‘CP23/24 Capital deduction for redress: personal investment firms’.

Apologies to SDR, but you were a disappointment so I’m not going to talk about you today. (Note, there are still some bits for us all to do on SDR, but that can be next week…)

Capital deduction for redress: personal investment firms… “Mads, can you translate for us please?"

You will all already know that all FCA regulated firms have the requirement to hold capital resources. This capital is a layer of protection for the consumer, combined with the mandatory professional indemnity insurance a firm must hold. The amount of capital a firm must hold is typically dependent on their income. (Please excuse over-simplification; I'm just trying to stick to the Eclipse vibe of interesting vs compliancey!)

The Consultation Paper suggests a change to the current formula of how that resource number is derived. The FCA are suggesting a ‘polluter pays’ model, so those that cause the problem (or could potentially cause the problem), pay for it. Simple?!

Why now?

In the CP there are some pretty shocking stats;

• £760m in redress paid between 2016-2022 in relation to firms that had exited the market,
• 95% of this was caused by only 75 firms
• The average compensation for complainants was £38,000. Meaning there were 20,000 complainants in the six year period; hardly a glowing testimonial for the sector. 

It’s clear from this that there’s a need for intervention, and speculation that the resource requirement could increase has been whispered about for some time.

Instead of simply raising the requirement, the FCA is proposing firms hold additional capital when they highlight they have potential redress claims, so in essence complaints. What the FCA is expecting firms to do is assess and quantify the amount of redress that could be due, apply a proportionate factor to that amount (28%) and hold this amount as additional capital. If a firm cannot (or does not) hold that additional capital, it is a breach of requirements and the FCA will whack on an asset retention order. (Again, I’m skimming details for Friday afternoon’s sake).

In theory, it’s a perfect model. Only firms that have exposure to redress hold the extra capital, everyone else remains the same. The FCA estimates that only 1/3 of the market will need to set aside additional capital.

In practice… (sigh).

• This model is very reliant on firms having detailed monitoring policies in place, via which, as per Consumer Duty, bad outcomes should be reviewed and scanned for. But for those that don’t, then what? It's very much a data issue and we know that not all firms have the best data or access to the data they do hold. 
• The second contingent of this proposal working is that those who do highlight potential harm, or have complaints, are able to correctly quantify the redress that could be applied to it.
• And finally, the practicality of this is potentially limited by those who do both of the above, actively reporting it.

The new capital deduction (what they’re calling the calculation) will be reported on a firm's RMAR via the RMA-D1. The confusing nature of RMAR just gives such scope for this not having the desired impact.

Anyone who has got this far into what is a compliance-heavy Eclipse are clearly minded to work with the theory. You will have processes in place, you will highlight potential redress, you will hold additional capital if required, and you will report it. But it is more work to stamp out that lowest common denominator, again. Firms looking to enter, or exit, the market will have a lot of work to do on the back of this.

The FCA has extended their standard consultation period for this, as they are aware it represents a fundamental change in ‘how things have been done’, to 20th March 2024. We, at The Verve Group, will be formalising a response, but really encourage you to do so also. Link below to the paper and form!

Oh and to round off the trifecta from the FCA, did someone say retirement income survey 2.0?! Grant and Paul are hosting a MASTER event next week looking at Retirement Income in practice, what good timing. And whilst we’re on events (segueing my way through this Eclipse aren’t I?!) join us for the final TALK of the year, with lots of The Verve Group taking centre stage to cram our thoughts on the year gone and the year coming in a teeny tiny 10 minute slot. Whew. 

I’m going to leave the beverage-related recommendations for this week, I’m venturing to the North East next week for our Christmas party so well save myself for then. (Okay, maybe one glass at my nephew’s Christening. I am being upgraded from ‘Fun Aunt’ to ‘Fun Godmother’ after all).

Have a great weekend all!

Study: and formulate your response to the FCA paper.

Attend: our MASTER event talking all things Retirement Income.

Join: the biggest TALK event of the year as we round up 2023 and look toward 2024.

Earlier this year we launched our brand-new business dashboard - Dextera™. It's already part of day-to-day life for over 1,500 users, and you can try it for yourself here.