The FCA’s plans to make investment advisers set aside funds in advance to compensate investors if bad advice is given have been cautiously welcomed by Financial Planners.

The proposals are an improvement on unpredictable Financial Services Compensation Scheme costs and could improve consumer confidence in the financial advice market, Financial Planners have told Financial Planning Today.

Keith Churchouse, founder and Chartered Financial Planner at Chapters Financial in Surrey, said: “This is a highly topical and contentious subject, and it is good to see the FCA announcement today, along with the start of the consultation and outreach process.

“What surprised me was the statistic the FCA quoted that 95% of compensation costs were generated by just 75 firms. We need robust consumer protection to continue and the ‘polluter’ should pay.

“As with all of these consultations (and this process lasts until mid-March 2024, so adviser firms should have their say), the devil will be in the detail and, of course, it is the interpretation of the existing views from the FCA, along with consultation responses, that may not give the positive outcomes that smaller firms may desire to be seen.”

However, some Financial Planners have expressed doubts over how well the plans could work in reality.

One Chartered Financial Planner said: “Measures such as this to ensure the polluter pays have been a long time coming, and if the FCA can find a way to make this work it could be a game changer for many advice firms and free up much needed funds for investment in other areas of their business.

“My concern is how will the FCA make sure that firms are accurately assessing and reporting their potential liabilities? Unless they can actually make sure bad actors actually report accurate figures and keep the required capital aside for compensation I don’t see how this can work.”

Another Financial Planner suggested that the FCA should work with professional indemnity insurers to ensure that firms report accurate liability figures.

Steven Levin, CEO of Quilter, said that the new model would create additional work for smaller firms.

He said: “We are fully supportive of the polluter pays model. It means that bad actors who have caused harm, or threaten to harm consumer outcomes will be penalised for their failings. While we need to understand the detail, it is likely that quality firms will broadly support this type of reform, which could serve to build trust with consumers and give greater confidence in advice in the longer term.

“We expect that larger firms, such as Quilter, already operate capital models that include the need to actively monitor for potential client remediation and, as such, already incorporate this methodology in their approach when determining the capital requirements of the business.

“While it may create additional work for smaller firms, as they will need to rigorously understand any potential need for future redress, it is better than the current unpredictable and significant ad-hoc costs under the FSCS which makes effective business planning difficult and can have a knock-on impact on investment in other areas.

“Through a more rational model for the capital that needs to be set aside and the right support that enables good client outcomes on a consistent basis, firms will be able to invest in the future growth of their business without the uncertainty of unexpected levies derailing their plans.”

Wealth management and financial advice trade body PIMFA welcomed the FCA proposals but shared concerns that firms would face the prospect of FSCS levy fees and the new capital requirements on top.

Liz Field, chief executive of PIMFA, said: “We would stress the need for these proposals to be proportionate, and specifically not to act as a barrier to firms wishing to enter the market. While we do strongly believe that these proposals will incentivise good advice, the FCA must be mindful that it does not strangle the supply of advice to consumers.

“We look forward to engaging with the consultation process and would urge the FCA to be mindful to the fact that, at least initially, firms will face the prospect of two charges by way of the FSCS levy and the requirement to hold additional capital as proposed. We still believe additional sources of funding to subsidise the FSCS levy should be considered to reduce this burden and would continue to urge the FCA and Treasury to consider FCA fines to subsidise the FSCS levy in the short term.”

Tom McPhail, director of public affairs at PR firm and industry consultancy The Lang Cat, said: “These proposals will be welcomed by the many well-run advisory firms who end up having to pay the costs of the irresponsible actions of a few bad actors in the sector.

"If the capital reserving requirements are too broad or too onerous though, they could become an expensive addition to the cost of doing business in their own right. Hopefully the proposals will take account of the practices and processes of responsible and well-run businesses, thereby ensuring they see a net reduction in their overall cost of doing business as a result of these measures.”