Read about what firms should and should not do to tackle polluting behaviour and meet their redress liabilities.
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.
What firms shouldn't do
- Fail to take reasonable steps to consider, provision for and address actual and potential redress liabilities whether by ring-fencing proceeds of sale, holding adequate run-off cover and/or capital to meet any redress liabilities.
- Distribute assets (for example, dividends paid to directors/shareholders) when there are potential or actual redress liabilities that have not been provisioned for appropriately.
- Sell client banks or assets where a fair, independent valuation has not been obtained as part of the sale process (for example, when a nominal amount or below market value is paid by the receiving firm for the transferred assets).
- Fail to undertake a customer contact exercise in a timely manner informing customers about any intended changes (like the sale of a client bank) that may impact their ability to consider the consequences to them individually and act to protect themselves against financial loss (like lodging a complaint before the firm dissolves or cancels).
- Fail to notify the FCA via a SUP 15 notification[3] about anything we ought to be made aware of (like the intention to sell or purchase the client bank or transfer assets).
- Change the ownership structure without prior FCA approval or alter the corporate structure to separate assets and consumer liabilities (for example, the transfer of assets to a holding company that is outside the regulatory perimeter).
- Appoint Senior Managers without ensuring they have the relevant experience or skills needed to run the business or inserting individuals into the business who have no real involvement to obscure the identities of the actual firm management.
What to expect from the FCA if you are in this situation
In line with our Consumer Duty[6], firms must act in good faith, avoid causing foreseeable harm, and enable and support retail customers to pursue their financial objectives. When we engage with a firm, whether as part of ongoing supervision or at the gateway, we expect it to clearly outline why it took a particular course of action in relation to redress liabilities and how it considered customers' interests in taking those decisions/actions.
At the gateway assessment stage, we will apply more scrutiny where we identify a greater risk of polluter behaviour. This includes closely examining the fitness and propriety of Senior Manager candidates. We will ask more questions, request evidence and may need more time for assessment to ensure risks are understood and adequately mitigated. If we do not consider that the risks have been adequately mitigated, we may refuse the application.
We systematically use information from a broad range of sources to tailor our questions and actions we take with individual firms. These include, for example, consumer feedback, information from firms and their trade associations, insight from other regulatory organisations, complaints data, information from MPs and whistleblowers, and our firm and consumer contact centre.
We will:
- Carefully scrutinise the rationale for the application.
- Request verifiable evidence of how the applicant has satisfied itself that it has discharged, satisfied, or resolved all complaints.
- Satisfy ourselves that the applicant and/or connected firm has discharged any unsettled or unexpired liabilities.
- Satisfy ourselves that the applicant and/or connected firm has provided a reasonable way to discharge any potential redress liabilities the firm anticipates may crystallise in the future (PRIN 2A.2.5R[7]).
- Ensure the applicant has adequately investigated any matters that could result in potential redress liabilities.
- Ensure the applicant has taken all reasonable steps to manage the risk of any cancellation of permissions that may adversely affect customers.
- Check applicants for connections to currently or previously authorised firms and individuals with past, existing or potential redress liabilities.
