On 29 November 2023, the FCA published Consultation Paper CP23/24 on Capital deduction for redress: personal investment firms (PIFs).

The consultation sets out the FCA’s proposals to require PIFs to be more prudent and set aside capital for potential redress liabilities at an early stage. The changes are being proposed due to the FCA’s concerns that some PIFs are causing consumers harm, with significant redress liabilities falling to the Financial Services Compensation Scheme. The FCA has also published a Dear CEO letter alongside CP23/24, reminding firms they must not seek to avoid potential redress liabilities.

The FCA’s intervention is specifically designed to be proportionate, build on existing obligations and target the firms that generate redress liabilities. These changes would be incorporated into Chapter 13 of the Interim Prudential Sourcebook for Business, which contains the existing prudential regime for PIFs.

The proposals aim to improve incentives for firms to deliver better consumer outcomes in the first place and improve firm resilience when things go wrong. The FCA is proposing to require PIFs:

  • To quantify an amount for their potential redress liabilities.
  • To set aside capital resources for potential redress liabilities through a new capital deduction.
  • Where they have potential redress liabilities that fall below their capital requirements, to comply with an asset retention requirement.

CP23/24 also includes a discussion chapter to look at broader improvements to the prudential regime for PIFs.

The deadline for feedback to CP23/24 is 20 March 2024.