New ‘polluter pay’ regulations from the Financial Conduct Authority (FCA) could pose further issues for those firms advising on defined benefit (DB) transfers, OAC has warned.

The FCA recently launched a consultation on the proposals, which would require personal investment firms to calculate their potential redress liabilities at an early stage, set aside enough capital to meet them and report potential redress liabilities to the FCA.

Any firm not holding enough capital will be subject to automatic asset retention rules to prevent them from disposing of their assets.

Announcing the consultation, the FCA pointed out that the Financial Services Compensation Scheme paid out nearly £760m between 2016 and 2022 for poor advice provided by failed personal investment firms, 95 per cent of which was generated by just 75 firms.

The proposals therefore aim to ensure that the polluter pays for the redress costs they generate, as those who provide bad advice who will be responsible for setting aside enough capital to compensate for it.

On the flipside, the proposals are also designed to create a significant incentive for firms to provide good advice in the first place and to right wrongs quickly.

The FCA said that the proposals aim to be proportionate, building on existing capital requirements.

The measures would also exclude around 500 sole traders and unlimited partnerships from the automatic asset retention requirements, as well as those that are part of prudentially supervised groups, which assess risk on a group-wide basis.

However, OAC head of redress solutions, Brian Nimmo, warned that the reforms could have a major impact on firms advising on DB transfers, and could trigger an acceleration in the trend for advice firms to leave the market.

He said: “Polluter Pays reforms will further increase the regulatory and financial burden on advisory firms – both now and in the past – who help those with a DB pension explore whether a transfer is in their best interests.

“Firms will have to assess the risk in their book before calculating a redress value on that risk which is likely to be an extremely tricky exercise. It may see an acceleration of the trend for advice firms to leave the market as they look to limit the capital they have to hold against future redress claims.

“Firms should be talking to their advisers to explore their capital requirements to get ahead of the game if these proposals are implemented.”

Alongside this, OAC's DB Redress Tracker showed that the level of compensation savers could expect to receive has dropped "significantly" as gilt yields have risen over the past 18 months.

OAC’s DB Redress Tracker follows the example of an individual who left their scheme in 2018 aged 50, with a pension of £10,000 p.a. which would receive inflation-linked increases when in payment.

This showed that a transferor making a compensation claim in Q3 2023 would have been entitled to around £22,000, while a similar claim made in Q1 2022 could have seen the transferor entitled to over £165,000, for example.

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