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CONRED 3.2 Financial resilience assessment

Purpose

CONRED 3.2.1G
  1. (1)

    1The purpose of CONRED 3.2 is to require firms to undertake a basic assessment of the adequacy of their financial resources to meet potential liability arising from unsuitable BSPS advice, and to facilitate the FCA’s supervision of these firms.

  2. (2)

    The outcome of the financial resilience assessment determines whether the asset restriction in CONRED 3.3 applies to transactions undertaken by a firm.

  3. (3)

    The assessment methodology outlined below is based on aggregate data that the FCA has collected during its supervision of firms that provided BSPS advice and relates to settled claims.

  4. (4)

    The financial impact on a firm of having given unsuitable BSPS advice may be higher or lower than this methodology indicates, because (for example) a firm may have given more or less unsuitable advice than the methodology assumes or underlying markets may have performed differently in particular cases. However, the methodology is intended to provide the firm and the FCA with an estimate of the firm’s BSPS redress liabilities and the resulting impact on its financial resilience.

  5. (5)

    The FCA expects firms to have adequate financial resources to be able to provide redress. Further guidance on assessing adequate financial resources is contained in FG20/1. Nothing in this chapter relieves a firm of the obligation to have adequate financial resources as required by Principle 4 and the threshold conditions.

  6. (6)

    For example, if a firm expects to have higher redress liabilities than the methodology in this section indicates (e.g. because the firm has reason to believe that it has given unsuitable advice in a higher proportion of instances of BSPS advice than the 46% assumed by the FCA’s methodology), the FCA would expect the firm to ensure that it can meet these liabilities. This would include refraining from undertaking the transactions described in CONRED 3.3.8R.

CONRED 3.2.2R
  1. (1)

    1A firm must assess its ability to meet BSPS claims for the relevant period using the following methodology:

    C − (N×L×AL) – CL2

    where:

    1. (a)

      C is the firm’s regulatory capital calculated in accordance with CONRED 3.2.3R;

    2. (b)

      N is the number of cases calculated in accordance with CONRED 3.2.4AR;2

      1. (i)

        [deleted]2

      2. (ii)

        [deleted]2

    3. (c)

      L is the likelihood that the firm’s BSPS advice was unsuitable, which a firm must estimate at 46%; 2

    4. (d)

      AL is the average liability that a firm incurs for unsuitable BSPS advice, which must be calculated in accordance with CONRED 3.2.5R; and 2

    5. (e)

      CL is the confirmed liabilities that a firm has, calculated in accordance with CONRED 3.2.6AR.2

  2. (2)

    Where the result of the calculation in (1):

    1. (a)

      is a positive value, the firm may conclude for the purposes of this chapter that it is able to meet BSPS claims in full; and

    2. (b)

      is a negative value or is zero, the firm must conclude for the purposes of this chapter that it is not able to meet BSPS claims in full.

  3. (3)

    For the purposes of this chapter, the result of the calculation in (1) is known as the ‘financial resilience assessment’.

Regulatory capital

CONRED 3.2.3R
1
  1. (1)

    A firm’s regulatory capital must be calculated in accordance with the prudential requirements applicable to it.2

  2. (2)

    If a firm has made a provision on its balance sheet for liabilities connected to unsuitable advice on scheme cases that has reduced its regulatory capital, it may disregard the provision when calculating its regulatory capital for the purposes of this chapter.2

CONRED 3.2.4G
  1. (1)

    1A personal investment firm’s regulatory capital is its capital resources calculated in accordance with IPRU-INV 13.15.

  2. (2)

    A MIFIDPRU investment firm’s regulatory capital is its own funds calculated in accordance with MIFIDPRU 3.

  3. (3)

    CONRED 3.2.3R(2) addresses the scenario where a firm makes a provision on its balance sheet to cover anticipated losses arising from unsuitable BSPS advice. The FCA encourages firms to consider making provision for redress liabilities on their balance sheets, in accordance with the relevant accounting standards. 2

  4. (4)

    When making a provision leads to a reduction of a firm’s regulatory capital, this could result in ‘double counting’ of potential BSPS liabilities when a firm performs the financial resilience assessment. As a result, the FCA is allowing a firm to disregard a provision that it has made which meets the relevant conditions. A firm may only disregard a provision to the extent it covers liabilities connected to unsuitable advice on scheme cases. Other provisions (for example, for liabilities for unsuitable advice that are not related to BSPS) must not be disregarded. A provision may also only be disregarded when it has led to a reduction of a firm’s regulatory capital.2

CONRED 3.2.4AR
  1. (1)

    2N is the total number of scheme cases and non-scheme cases, less any cases falling within (2) or (3).

  2. (2)

    A firm may exclude the following scheme cases from N:

    1. (a)

      a case where the firm has sent the consumer the redress determination in CONRED 4 Annex 3R (Redress determination: confirmation of consumer opt-out) in accordance with the requirements in CONRED 4;

    2. (b)

      a case where:

      1. (i)

        one of the following conditions is met:

        1. (A)

          the firm has sent the consumer the redress determination letter in CONRED 4 Annex 6R (Redress determination: further information not provided) in accordance with the requirements in CONRED 4;

        2. (B)

          the firm has sent the consumer the redress determination letter in CONRED 4 Annex 8R (Redress determination: unsuitable advice, no causation) in accordance with the requirements in CONRED 4; or

        3. (C)

          the firm has sent the consumer the redress determination letter in CONRED 4 Annex 9R (Redress determination: suitable advice) in accordance with the requirements in CONRED 4;

      2. (ii)

        6 months have expired since the date of the letter in (i); and

      3. (iii)

        a complaint relating to the letter in (i) has not been made to the Ombudsman;

    3. (c)

      a case where a complaint has been made to the Ombudsman relating to the letter in CONRED 3.2.4AR(2)(b)(i), and the Ombudsman has dismissed the complaint; or

    4. (d)

      a case where the firm, the Ombudsman or a skilled person has concluded that the advice provided to the consumer did not comply with the suitability requirements and has answered ‘yes’ to the causation question in the BSPS DBAAT or FCA DBAAT.

  3. (3)

    A firm may exclude a non-scheme case in scenarios analogous to those in (2).

  4. (4)

    If a firm is unsure whether a case falls within any of the exclusions in CONRED 3.2.4AR (2) or (3), it must include the case in N.

CONRED 3.2.4BG
  1. (1)

    2N is intended to be a dynamic number that reflects the total number of cases that could give rise to a redress liability. As a firm makes progress in resolving cases, we expect this number to fall as cases are either recognised as ‘confirmed liabilities’ (‘CL’) or resolved in a way that confirms there is no liability.

  2. (2)

    CONRED 3.2.4AR(2) explains when a firm may cease counting a scheme case towards N. It works by referring to stages of the consumer redress scheme in CONRED 4, and certain letters required to be sent under the scheme.

  3. (3)

    Non-scheme cases are cases which are not required to be resolved through the consumer redress scheme, but which pose similar risks. As these cases are not required to be resolved in accordance with the prescriptive rules in CONRED 4, we are permitting a firm to exclude non-scheme cases in analogous scenarios to those in CONRED 3.2.4AR(2). For example, where a case has been excluded from the redress scheme because the firm appointed a skilled person to carry out a past business review and the firm has communicated to the consumer that the advice was suitable, a firm may exclude this case from N if 6 months have expired without a complaint to the Ombudsman, or if the Ombudsman dismisses the complaint.

Average liability for unsuitable BSPS advice

CONRED 3.2.5R
  1. (1)

    1A firm must calculate AL as 11%2 of the mean cash equivalent transfer value for BSPS advice (excluding any advice given to BSPS members falling within CONRED 3.2.4AR (2) or (3))2 that the firm provided in the relevant period, subject to (2).

  2. (2)

    A firm may reduce the value of AL to reflect the impact of professional indemnity insurance if both of the following conditions are met:

    1. (a)

      the relevant insurance policy does not exclude BSPS advice from the scope of coverage; and

    2. (b)

      the relevant insurance policy does not exclude from the scope of coverage any liability that results from a consumer redress scheme.

  3. (3)

    Any reduction in the value of AL that a firm applies under (2) must not exceed the maximum level of coverage in respect of BSPS advice that the firm could reasonably expect to rely upon under the policy, taking into account any policy exclusions or conditions.

  4. (4)

    Where a firm has reduced the value of AL to reflect the impact of professional indemnity insurance, it must immediately recalculate the value of AL and update the outcome of the calculation in CONRED 3.2.2R if:

    1. (a)

      there is a subsequent change in the terms of that insurance that affects its scope or coverage; or

    2. (b)

      the insurance policy lapses or is otherwise terminated.

CONRED 3.2.6G
  1. (1)

    1The purpose of CONRED 3.2.5R(2) is to recognise that a firm may hold professional indemnity insurance that covers the risk of unsuitable BSPS advice, which can mitigate the impact on the firm’s financial resources.

  2. (2)

    A firm must not apply a reduction in relation to professional indemnity insurance if the conditions in CONRED 3.2.5R(2) are not met.

  3. (3)

    When considering the impact of professional indemnity insurance on the firm’s potential liability for BSPS advice, a firm must take into account any exclusions or conditions (for example, excesses) under the relevant policy. The firm should also consider how these might interact, such as where 2 or more claims may be treated as a single claim for the purposes of the excess or the limit of indemnity.

  4. (4)

    If a firm has relied upon professional indemnity insurance to cover some of its potential liability for BSPS advice in accordance with CONRED 3.2.5R(2), it is possible that the terms of that insurance may subsequently change. Alternatively, the relevant insurance policy may lapse or may be terminated. In such circumstances, the firm must immediately recalculate the value of AL under CONRED 3.2.5R(1) and update the calculation in CONRED 3.2.2R. If the updated calculation indicates that the firm is unable to meet all claims for BSPS advice for the purposes of this chapter, the firm must immediately notify the FCA under CONRED 3.2.7R.

CONRED 3.2.6AR
  1. (1)

    2CL must be calculated in accordance with this rule.

  2. (2)

    A firm has a confirmed liability where the firm, Ombudsman or a skilled person has concluded that the advice provided to a consumer did not comply with the suitability requirements and has answered ‘yes’ to the causation question in the BSPS DBAAT or FCA DBAAT.

  3. (3)

    A firm may cease to treat a scheme case as a confirmed liability in the following scenarios:

    1. (a)

      the firm has paid redress to the consumer in full and final settlement; or

    2. (b)
      1. (i)

        one of the following applies:

        1. (A)

          the firm has sent the consumer the redress determination letter in CONRED 4 Annex 12R (Redress determination: Redress calculation – information not provided) in accordance with the requirements in CONRED 4;

        2. (B)

          the firm has calculated the amount of redress owed to the consumer in accordance with CONRED 4.4.2R, decided that no redress is owed, and has sent the consumer the redress determination letter in CONRED 4 Annex 13R (Redress determination: Result of redress calculation) in accordance with the requirements in CONRED 4; or

        3. (C)

          the firm has sent the consumer the redress determination letter in CONRED 4 Annex 17R (Redress Determination: payment acceptance not provided) in accordance with the requirements in CONRED 4;

      2. (ii)

        6 months have expired since the date of the letter in (i); and

      3. (iii)

        a complaint relating to the letter in (i) has not been made to the Ombudsman; or

    3. (c)

      a case where a complaint has been made to the Ombudsman relating to the letter in CONRED 3.2.6AR(3)(b)(i), and the Ombudsman has dismissed the complaint.

  4. (4)

    A firm may cease to treat a non-scheme case as a confirmed liability in scenarios analogous to those in (3).

  5. (5)

    If a firm is unsure whether a case falls within any of the exclusions in CONRED 3.2.6AR(3) or (4), it must include the case in CL.

  6. (6)

    A firm must quantify each confirmed liability as 11% of the mean cash equivalent transfer value for that case.

  7. (7)

    CL is the aggregate amount of all confirmed liabilities.

  8. (8)

    A firm may reduce the value of CL to reflect the impact of professional indemnity insurance where the conditions in CONRED 3.2.5R(2) to (4) are met (and applying the conditions and obligations in CONRED 3.2.5R(2) to (4) as if references to AL were to CL).

Notification requirements

CONRED 3.2.7R
  1. (1)

    1A firm must (save in the circumstances in (1A)) have notified2 the FCA of the outcome of the financial resilience assessment in CONRED 3.2.2R before the end of 27 May 2022.

  2. (1A)

    A firm that has only provided BSPS advice to a total of 3 or 4 members of the BSPS must notify the FCA of the outcome of the financial resilience assessment in CONRED 3.2.2R before the end of 28 February 2023.2

  3. (2)

    If a firm has relied on professional indemnity insurance to reduce the value of its potential liability for BSPS advice in accordance with CONRED 3.2.5R(2), the notification in (1) must contain:

    1. (a)

      a statement of the value of the reduction that the firm has applied in connection with the professional indemnity insurance; and

    2. (b)

      an explanation of why the firm has concluded that the potential liability is covered by professional indemnity insurance.

  4. (3)

    A firm must update its financial resilience assessment referred to in (1) or (1A):2

    1. (a)

      immediately following any change in the firm’s circumstances that could materially reduce its ability to meet BSPS claims; and

    2. (b)

      in any case, at least once a month.

  5. (4)

    A firm must immediately notify the FCA if the firm has updated its financial resilience assessment and the outcome previously notified to the FCA has changed.

  6. (5)

    Any notification made under (1), (1A), (4) or (7)2 must:

    1. (a)

      be submitted as follows:

      1. (i)

        where an electronic system has been made available by the FCA for the purposes of the notification, the notification must be submitted using that electronic system; and

      2. (ii)

        in any other case, the notification must be submitted by email to the FCA at BSPSredress@fca.org.uk; and

    2. (b)

      be approved and signed by an individual approved to perform the compliance oversight function for the firm or, if that is not possible, by an individual approved to perform another appropriate senior management function within the firm.

  7. (6)

    For the purposes of (5)(b), a notification is to be treated as signed where any of the following apply:

    1. (a)

      it contains an image of a ‘wet ink’ signature applied by the appropriate individual;

    2. (b)

      it contains an electronic signature applied by the appropriate individual; or

    3. (c)

      it contains a typed name applied by, or with the express consent of, the appropriate individual.

  8. (7)

    A firm must promptly notify the FCA once N and CL, as calculated under CONRED 3.2.4AR and CONRED 3.2.6AR, are both zero.2

  9. (8)

    This rule ceases to apply to a firm once N and CL, as calculated under CONRED 3.2.4AR and CONRED 3.2.6AR, are both zero and the firm has notified under (7).2

CONRED 3.2.8G
  1. (1)

    1The notification requirements in CONRED 3.2.7R are intended to facilitate the FCA’s supervision of relevant firms.

  2. (2)

    While some inputs into the methodology in CONRED 3.2.2R are static assumptions, the FCA expects other inputs (e.g. a firm’s calculation of its regulatory capital) to change over time. The FCA therefore requires firms to notify it if the outcome of their financial resilience assessment changes - i.e. if a firm previously calculated that it was able to meet BSPS redress liabilities, but now calculates that it cannot do so or vice versa.

  3. (3)

    A firm must update the outcome of the calculation under CONRED 3.2.2R immediately following any change in the firm’s circumstances that might materially reduce its ability to meet BSPS claims. In any case, a firm must also ensure that it has updated the outcome of the calculation at least once a month to ensure ongoing monitoring of its position.

  4. (4)

    A firm is not required to notify the FCA if, following an update to its financial resilience assessment, the outcome previously notified to the FCA has not changed. However, firms are reminded of their separate obligations under Principle 11 to inform the FCA of anything of which the FCA would reasonably expect notice. Therefore, if a firm has already notified the FCA that it does not have sufficient regulatory capital to meet BSPS claims under CONRED 3.2.2R but there is a further substantial deterioration in the firm’s financial position, the firm should update the FCA. The FCA may also engage with firms directly to discuss their financial resilience assessments and their broader financial situation as part of the FCA’s ongoing supervision work.

  5. (5)

    Each notification submitted under CONRED 3.2.7R must be signed by a person who holds an appropriate senior management function within the firm. The FCA would generally expect that this would be the individual approved to perform the compliance oversight function, but if that is not possible, this may be a holder of a different senior management function.