Polluter pays principle comes to U.K. advice market

Investment advisory firms will be required to set aside capital to potentially redress to harmed clients, under a new proposal from the U.K.’s Financial Conduct Authority (FCA).

The regulator launched a consultation on proposals that would require firms to calculate their potential redress costs at an early stage, report those potential costs to the FCA, and then allocate capital to meet those liabilities.

Firms that don’t set aside enough capital would face automatic asset retention rules that prevent them from depleting their assets.

In addition to beefing up investor protection, the initiative is designed to ensure that the firms that are doling out bad advice pay the costs of those actions, rather than socializing those expenses through industry-wide charges.

The FCA reported that the U.K.’s Financial Services Compensation Scheme paid out nearly £760 million between 2016 and 2022 for poor advice that was provided by failed investment firms.

Further, it noted that 95% of this total was generated by just 75 firms.

“The proposals seek to ensure that the polluter pays for the redress costs they generate,” the regulator said in a release.

“It will be those who provide bad advice who will be responsible for setting aside enough capital to compensate for it. In turn, the proposals will create a significant incentive for firms to provide good advice in the first place and to right wrongs quickly,” the FCA noted.

“We want to see a thriving financial advice market to make sure consumers can access the support they need from financially resilient advice firms that want to do the right thing,” said Sarah Pritchard, FCA’s executive director of markets and international, in a release.

“Diligent advisers are having to compensate through the levy for the bad advice of their failed competitors. That needs to change. It is important that the polluter pays,” she added.

The proposal is out for an extended consultation, running until March 20, 2024.

The FCA said it intends to finalize the rules in the second half of next year, with the requirements taking effect in the first half of 2025.