Read about what firms should and should not do to tackle polluting behaviour and meet their redress liabilities.
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We expect all firms to have adequate financial resources to be able to provide redress as part of complying with Principle 4 (Financial prudence)[1] and the threshold conditions. Firms that are subject to detailed prudential standards are also required to comply with those standards, which supplement but do not exhaust the application of the Principles or threshold conditions.
Polluter behaviours cause considerable harm to consumers and the markets we regulate. While there will be occasions where a firm is genuinely unable to meet its liabilities, firms should not seek to leave their liabilities behind. They should provide robust reasons for the actions and decisions they intend to take and be prepared to evidence those.
Firms are under a duty to act in good faith towards retail customers and must avoid causing them foreseeable harm. When firms receive a complaint, they must handle it in accordance with DISP[2], which includes assessing complaints fairly, consistently, and promptly.
Why the polluter should pay
Polluter behaviour occurs when a firm or individual takes steps that leave behind potential or actual redress liabilities generated in the course of their regulated activities.
This is especially damaging for retail consumers who are unable to seek appropriate redress from the firm whose actions caused them loss.
Consumers become reliant on the FSCS (where available), which often means they may not receive the full amount owed. It undermines trust in the financial system and the reputation of the industry.
The other impact is the rising cost of the FSCS levy, which impacts firms across the market. Polluter behaviour means the entire industry pays for the poor conduct of a small group of firms and that’s not fair on those firms that do play by the rules.
Poor practices have meant that the FSCS has paid out £760m in redress for personal investment firms that left the market between 2016 and 2022, affecting 20,000 consumers. A third of these liabilities (around £224m) were paid by the FSCS in the 2 years after the firm exited.
FSCS compensation for investment claims is capped at £85,000. In some cases, consumers’ losses exceed FSCS limits, and these consumers are not fully compensated for their losses.
What firms should do
- 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, that sale proceeds and/or assets have been ring-fenced and by assessing the risk of the advice given through robust files reviews and ongoing review of past advice.
- Ensure a customer contact exercise is completed, giving clear and timely communications to inform customers of the firm’s intention(s) to sell the client bank, potential impacts and customers rights to claim in respect of past advice, particularly where the transferring entity is proposing to dissolve.
- 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 – we often see good firms using a deed poll to do this.
- Submit a SUP 15 notification[3] (authorised firms only) to inform us of anything we ought to 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[4] 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[5] 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, we expect 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.