The FCA has today published proposals to compel investment advisers to set aside funds in advance to compensate investors if bad advice is given.

The FCA said its proposals would require about 5,000 'personal investment firms' - investment advisers - to set aside capital so that they can cover compensation costs in the event of claims.

The FCA says this will ensure the “polluter pays” when consumers are harmed. 

The regulator said the additional capital requirements falling on firms would be "proportionate."

The proposals would require investment advisers (referred to as personal investment firms by the FCA) to calculate their potential redress liabilities at an early stage and then set aside enough money to meet theses liabilities and report potential redress liabilities to the FCA.

Any firm not holding enough capital will be subject to automatic asset retention rules to prevent them from disposing of their assets, the FCA said. 

The move is seen as an attempt by the FCA to combat the growing problem of failed investments advisers who provided bad advice dumping their substantial liabilities on the Financial Services Compensation Scheme (FSCS).

The FSCS paid out nearly £760m between 2016 and 2022 for poor advice provided by failed personal investment firms. Some 95% of this was generated by just 75 firms, the FCA said. 

Sarah Pritchard, FCA executive director of markets and international, said: “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. 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."

The FCA says the proposals will create, “a significant incentive” for firms to provide good advice in the first place and to right wrongs quickly. 

The proposals will be “proportionate”, the FCA said, and build on existing capital requirements.

The measures would exclude about 500 sole traders and unlimited partnerships from the automatic asset retention requirements. Firms that are part of prudentially supervised groups, which assess risk on a group-wide basis, would also be excluded. 

The FCA is seeking industry views on the change which build on over 250 responses to the FCA’s previous call for input on the Consumer Investments Markets and the Compensation Framework Review.

The FCA is extending its normal consultation period to 16-weeks because of the importance of the changes, it said. The FCA expects to publish the next steps in the joint review of the Advice Guidance Boundary which it is conducting alongside the Government in the coming weeks.

The watchdog said that the review and today’s announcement support the FCA’s consumer investments strategy which aims to help consumers invest with confidence, with access to the support they need from financially resilient advice firms. They also deliver on all three commitments in the FCA’s 3-year strategy to reduce harm, set higher standards and promote positive change.  

The FCA is planning an extensive programme of outreach to the industry and consumer groups as part of the consultation which runs until 20 March.

• CP23/24: Capital deduction for redress: personal investment firms

• See other stories on this topic published today.