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Dear CEO | Release Date: 29th November 2023

To read a shorter summary of this Dear CEO letter, click here.

To access the original FCA document, click here.

Long Summary

The Financial Conduct Authority (FCA) recently published a Consultation Paper (CP) on proposed changes to the prudential regime for Personal Investment Firms (PIFs), specifically the IPRU-INV 13. In conjunction with this, a “Dear CEO” letter was issued to remind these firms of their ongoing responsibilities during the consultation period and to outline the measures the FCA plans to take against firms that attempt to circumvent these responsibilities.

Firms’ Ongoing Responsibilities

Duty to Act in Good Faith

PIFs are reminded of their duty to act in good faith, particularly when dealing with customers who have suffered foreseeable harm. This includes the fair, consistent, and prompt assessment of complaints in accordance with the Dispute Resolution: Complaints sourcebook (DISP). The FCA emphasises the importance of continuing these practices unabated during the consultation period.

Financial Resource Assessment

The letter stresses that PIFs must continuously assess their financial resources relative to the complexity of their business and the risk of customer harm. Adequate financial resources are necessary to cover potential redress liabilities. The FCA has expressed concerns about firms altering their corporate structures to isolate liabilities or protect assets, which could include actions such as overpaying dividends or pushing the firm towards insolvency.

Notification Requirements

PIFs are required to notify the FCA immediately if they anticipate issues such as inadequate resources to provide potential redress, intentions to sell or transfer their client bank, or desires to offer consumers less redress than might be due. The FCA outlines these notification requirements in SUP 15 of their handbook.

Authorisations and Cancellations During the Consultation Period

Increased Monitoring

During the consultation period, the FCA will increase monitoring of firms applying for new authorisations or seeking to cancel existing ones. This step is intended to prevent attempts to sidestep redress liabilities or engage in phoenixing—re-emerging under a new entity to escape past liabilities.

Scrutiny and Verification

Applications for authorisation or cancellation will undergo careful scrutiny. The FCA requires verifiable evidence that all complaints have been resolved and all liabilities discharged. Additionally, they will assess whether applicants have taken reasonable steps to manage risks that could adversely affect customers, such as taking out professional indemnity insurance or conducting thorough customer contact exercises.

Potential for Phoenixing

Special attention will be given to applicants connected to currently authorised firms with outstanding redress liabilities to prevent phoenixing. The FCA will evaluate these connections critically and may require further actions if firms do not fully address related issues.

Key Takeaways and Actions for Affected Readers

Compliance with FCA Expectations

It is crucial for PIFs to align their operations with the expectations set out by the FCA. This includes acting in good faith, maintaining adequate financial resources, and handling customer complaints appropriately.

Monitoring Corporate Changes

Firms must avoid restructuring corporate formations in ways that might protect assets from liabilities or otherwise evade responsibilities towards customers.

Notification to the FCA

Immediate communication with the FCA is mandatory if firms foresee potential issues related to financial resources, client transfers, or redress liabilities. Ensuring transparency with the regulator will be key in maintaining trust and compliance.

Preparation for Increased Scrutiny

Firms should be prepared for increased scrutiny during the application processes for new authorisations or cancellations. Ensuring all liabilities are cleared and that there are robust plans to manage potential redress responsibilities is crucial.

Sharing Information and Feedback

Finally, firms are advised to share the contents of the FCA’s letter with their boards or equivalent governing bodies and provide feedback on the ongoing consultation to ensure all viewpoints are considered in the final regulatory framework.

By adhering to these guidelines, Personal Investment Firms can ensure they remain compliant with regulatory expectations and safeguard their operational integrity and the interests of their customers.

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