Financial firms may need to compensate customers when they provide poor advice, products or services, some firms do this effectively, applying the value in their business to remediate issues, but FCA is increasingly seeing firms trying to avoid doing this.
Whilst still benefiting from assets of the business, this is known as polluting behavior.
Polluter Pays Guidance
FCA describes main examples of polluting behaviors: basic phoenixing; lifeboating; fronting; sale at undervalue; restructuring; sale proceeds not applied to redress.
A firm which causes the market to pay for its mistakes through the UK FSCS levy or shifts the loss onto customers is not playing fair, damages reputation of the market.
Regulator wants polluters to pay for the liabilities they create so that customers and market participants can feel confident about doing business with authorized firms.
And wants firms to compete for business a level playing field, with market integrity.
Expectations for Firms
Firms must not seek to avoid potential or actual redress liabilities, FCA expects firms to ensure they and any appointed representatives (ARs) adequately plan for redress liabilities, including holding adequate financial resources to meet them.
Should notify FCA immediately when: firm becomes aware or information suggests that they do not have enough adequate resources to provide potential redress.
Intends to sell/transfer client bank and this could impact risk profile, value, resources.
Has potential redress liabilities, wants to offer consumers less than they may be due.
FCA also expects firms to identify and meet any potential liabilities before it will cancel their authorization, may use past business reviews to ensure liabilities identified.
Helping the FCA
FCA encourages regulated firms, financial advisers, compliance firms, other financial advice organizations to report any firm/individual suspected of providing poor advice, products or services, or attempting to phoenix to avoid their liabilities to consumers.
Be open and transparent when FCA requests regulatory references; contact FCA immediately if firm has had an award made against it by UK FOS and are worried that the firm will not be able to provide the redress, so FCA can provide support.
Ensure thorough due diligence/compliance checks carried out all advisers to ensure no poor advice given previously; ensure all advice is compliant, consumers understand.
Redress Liabilities Update
Second guidance page sets out what firms should and should not do to tackle polluting behavior and meeting their redress liabilities, including why the polluter should pay.
What Firms Should Do
Take reasonable and verifiable steps to ensure any potential and actual redress liabilities have been considered, provisioned for and addressed in all circumstances.
Ensure a customer contact exercise is completed, giving clear, timely communications to inform customers of firm's intention sell client bank, customers rights to claim.
Obtain fair, independent valuation for client banks; agree on transfer of liabilities alongside the customer or assets to ensure good customer outcomes.
Authorized firms should submit SUP 15 notification to inform FCA of anything it ought to be aware of in good time before transactions take place e.g. restructure of firm.
Seek FCA approval prior to any change in control; submit robust wind-down plan where applicable; ensure firm keeps up to date with FCA guidance/communications.
Ensure candidates for Senior Management roles have relevant skills and experience.
What Firms Should Not Do
Fail to take reasonable steps to consider, provision for, address redress liabilities.
Distribute assets when there are potential or actual redress liabilities that have not been provisioned for appropriately; sell client banks without independent valuation.
Fail to undertake customer contact exercise; fail to notify FCA via SUP 15 notification.
Change ownership structure without prior FCA approval or alter corporate structure to separate assets and consumer liabilities; appoint Senior Managers without ensuring they have the relevant experience or skills needed to run business, or insert individuals into business with no real involvement, to obscure identities of actual management.
FCA sets out how it will proceed if it finds firms are in the above situations.
