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FCA cans plans for 'surety bonds' to cut adviser FSCS costs

FCA cans plans for 'surety bonds' to cut adviser FSCS costs

The Financial Conduct Authority (FCA) has dropped a proposal to ask those advising on high risk investments to buy a surety bond or pay into a trust in case of claims. 

In October, the regulator sought views on whether requiring certain personal investment firms to pay capital into a trust account, or purchase a surety bond could ensure more claims are paid for by firms or their insurers rather than the FSCS. 

The proposal was designed to cut FSCS bills for advisers.

However, in its final rules on the FSCS funding review published today, the FCA has decided against the move. 

Regarding the trust proposal, the FCA pointed to feedback it received which suggested this would increase costs for firms and create barriers to competition for smaller advice businesses, particularly given existing capital adequacy requirements.

Respondents also argued that it would not tackle historic issues, and that requiring cash funds rather than assets would create a 'greater burden and therefore a greater disincentive'. 

The FCA said: 'Further work on this proposal has led us to the conclusion that it is not an efficient way of achieving the desired outcome, which is to ensure that high-risk personal investment firms contribute more to the FSCS because they are more likely to create redress liabilities.

'For this intervention to work, we need to be able to target the minority of  advisers providing unsuitable advice.'

The surety bond proposal had received less support, with responses suggesting it would increase costs for all firms rather than being targeted at those considered high-risk, while insurers might also be reluctant to offer such a product to higher risk firms.

Many respondents also expressed concerns about having to take out two forms of insurance, due to additional costs which would potentially be passed on to consumers.

The FCA has begun collecting data on sales of high-risk investment products on 1 April, with a view to developing risk-based levies, and would consider the case for consulting on those in 2019.  

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