1The provisions in this chapter are ultimately intended to secure the payment of redress to consumers by ensuring that a firm does not inappropriately dissipate assets that could otherwise be used to fund redress payments. However, they do not relate directly to a consumer redress scheme and are not made using the power in section 404 of the Act.

1. (1)

   1CONRED 3.1.4R disapplies the requirements in CONRED 3 for certain categories of firm where the FCA has concluded that:

   1. (a)

      due to the legal structure or status of the firms concerned, the requirements would be inappropriate, disproportionate or unnecessary; or

   2. (b)

      the relevant firms pose a lower relative risk of harm in relation to potential BSPS redress payments.

2. (2)

   However, the FCA reiterates the expectations set out in its Dear CEO Letter dated 31 March 2022 for these firms. To ensure that they have adequate financial resources, out-of-scope firms should continue to retain assets so that they can meet costs arising in connection with any BSPS redress. A copy of the FCA’s Dear CEO Letter is available here: https://www.fca.org.uk/publication/correspondence/british-steel-pension-scheme-consultation-redress-scheme.pdf

3. (3)

   The FCA reminds SMF managers at out-of-scope firms that they are personally accountable for breach of the conduct rules in COCON. For example, Senior Manager Conduct Rule 2 requires an SMF manager to take reasonable steps to ensure that the business of the firm for which they are responsible complies with the relevant requirements and standards of the regulatory system. SMF managers should take account of the expectations in the FCA’s Dear CEO Letter when complying with their regulatory obligations.

1Under CONRED 3.1.6R(2), a firm will be treated as having provided BSPS advice if the firm has assumed liability for potentially unsuitable advice given by another person in relation to transfers of interests in the BSPS. This could arise, for example, where there has been a sale or other transfer of a client book to the firm and the terms of that sale or transfer have resulted in the firm assuming liability for the provision of BSPS advice by the original transferor.

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.

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.

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.

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.

1. (1)

   1The purpose of CONRED 3.3 (Asset restriction) is to maximise a firm’s ability to meet redress liabilities to consumers, by limiting its ability to dissipate assets before it has assessed and paid any redress it owes.

2. (2)

   The asset restriction is designed only to interfere with a firm’s ability to transact in its assets to the extent necessary to protect consumers who may be owed redress. The asset restriction therefore permits any transaction, as long as a firm calculates, using the methodology in CONRED 3.2, that it will continue to be able to meet its redress liabilities immediately after the transaction.

3. (3)

   If a firm calculates, using the methodology in CONRED 3.2, that it will not be able to meet its redress liabilities, then the asset restriction prevents the firm from carrying out any transaction unless the transaction is in the ordinary course of business.

4. (4)

   The FCA has made rules and guidance about what the ordinary course of business means. The FCA expects that these will generally be sufficient to allow a firm to interpret the asset restriction. On occasion, however, a firm may feel the need to seek individual guidance from the FCA. Further information on seeking individual guidance is contained in SUP 9. Requests for individual guidance on the asset restriction may be directed to BSPSredress@fca.org.uk.

5. (5)

   Where a firm wishes to make a transaction that is in the ordinary course of business but is not listed in CONRED 3.3.5R, the firm must first notify the FCA in accordance with CONRED 3.3.10R.

1The FCA reminds SMF managers that they are personally accountable for breach of the conduct rules in COCON. For example, Senior Manager Conduct Rule 2 requires an SMF manager to take reasonable steps to ensure that the business of the firm for which they are responsible complies with the relevant requirements and standards of the regulatory system.

1. (1)

   1CONRED 3.3.3R contains a restriction (the ‘asset restriction’) that prevents a firm from undertaking transactions that could have the effect of dissipating the value of the firm’s assets, except to the extent that an exception in CONRED 3.3.3R(1) or (2) applies.

2. (2)

   Under CONRED 3.3.3R(1), the asset restriction does not apply to a transaction that a firm undertakes in the ordinary course of business. CONRED 3.3.5R contains a non-exhaustive list of transactions that a firm may treat as being undertaken in the ordinary course of business for these purposes. CONRED 3.3.6R contains a list of transactions that a firm must not treat as being undertaken in the ordinary course of business.

3. (3)

   Under CONRED 3.3.3R(2), the asset restriction does not apply to any other transaction undertaken by a firm that:

   1. (a)

      has notified the FCA that it has calculated (using the methodology in CONRED 3.2.2R) that it can meet its BSPS redress liabilities; and

   2. (b)

      has calculated (using the methodology in CONRED 3.2.2R) that it will continue to be able to meet its BSPS redress liabilities immediately after the relevant transaction occurs.

4. (4)

   In summary, the overall effect of the provisions outlined in (1) to (3) is therefore as follows:

   1. (a)

      a firm that has calculated under CONRED 3.2.2R that it has sufficient regulatory capital to meet its BSPS redress liabilities and has notified the FCA that this is the case is not subject to the asset restriction at all, provided that the firm will continue to hold sufficient regulatory capital after any proposed transaction occurs; and

   2. (b)

      a firm that has calculated under CONRED 3.2.2R that it does not hold sufficient capital to meets its BSPS redress liabilities is subject to the asset restriction. However, the firm may continue to undertake transactions that are in the ordinary course of its business.

1The purpose of CONRED 3.3.6R is to permit a firm that is subject to the asset restriction to pay dividends or drawings to individual shareholders or members where those individuals perform services for the firm and have historically been paid through similar dividends or drawings and prior FCA consent to the dividends or drawings has been obtained. Any dividends or drawings paid must be consistent in terms of both their value and their timing with previous dividends or drawings paid by the firm for that purpose. The firm must also confirm to the FCA that the payment of the dividend or drawings would be lawful, having regard to any relevant restrictions that may apply in areas such as company law or insolvency law. A firm may wish to obtain professional advice to confirm its analysis before giving the required confirmation.

1The effect of CONRED 3.3.3R is that a firm that has not notified the FCA that it is able to meet all BSPS claims under its financial resilience assessment under CONRED 3.2.2R must not undertake any of the types of transactions listed in CONRED 3.3.8R.

1The FCA expects that a firm would make a notification of the type specified in CONRED 3.3.10R(2) only in genuinely urgent cases and where it has not been possible to identify the need for the relevant transaction sufficiently in advance. In such cases, the firm must still give the FCA as much notice as possible.

1For the purposes of CONRED 3.3.12R(2), payments may be connected because they are made to the same person, or because they are made to separate persons who are connected by virtue of being close relatives, or through an agent-principal relationship or through a relationship of control.