Reset to Today

To access the FCA Handbook Archive choose a date between 1 January 2001 and 31 December 2004.

Content Options:

Add to favourites

View Options:

More Resources:

External link Handbook Publications

You are viewing the version of the document as on 2024-08-01.

Timeline guidance

Alternative versions

  3. Point in time
    2024-08-01

CONRED 3.1 Interpretation and application

Interpretation

CONRED 3.1.1 R

1In this chapter, the following definitions apply:

  1. (1)

    ‘asset restriction’ means the restriction in CONRED 3.3.3R;

  2. (2)

    ‘BSPS’ means the Old British Steel Pension Scheme (known during the relevant period as the British Steel Pension Scheme) that entered a Pension Protection Fund assessment period on 29 March 2018;

  3. (3)

    ‘BSPS advice’ means advice in relation to which all of the following conditions are met:

    1. (a)

      the advice was given to a consumer during the relevant period;

    2. (b)

      the advice was to transfer the consumer’s BSPS pension benefits;

    3. (c)

      the advice was subject to the suitability requirements; and

    4. (d)

      the consumer subsequently transferred their BSPS pension benefits;

  4. (4)

    ‘BSPS claims’ means potential liability that a firm may incur for BSPS advice, determined in accordance with CONRED 3.2.2R(1)2;

  5. (4A)

    ‘BSPS DBAAT’ means the British Steel Pension Scheme Defined Benefit Advice Assessment Tool in the form of the document at CONRED 4 Annex 20R;2

  6. (4B)

    ‘causation question’ is whether the firm’s failure to comply with the suitability requirements is the effective cause of the consumer’s loss;2

  7. (4C)

    ‘FCA DBAAT’ means the FCA Defined Benefit Advice Assessment Tool;

    [Editor’s note: the FCA DBAAT is available at https://www.fca.org.uk/firms/defined-benefit-pension-transfers]2

  8. (5)

    ‘financial resilience assessment’ has the meaning in CONRED 3.2.2R(3);

  9. (6)

    ‘relevant period’ means 26 May 2016 to 29 March 2018 (inclusive of both dates);

  10. (6A)
    1. (a)

      ‘scheme case’ is a case that meets the conditions in CONRED 4.2.2R, as modified by CONRED 4.2.3R;2

    2. (b)

      for the purposes of (a), CONRED 4.2.2R(5) must be read as follows:2

      (5)

      the consumer had not, prior to the scheme effective date, accepted an offer of redress from the firm or other person that was:

      (a)

      calculated in accordance with the applicable rules and guidance; and

      (b)

      in full and final settlement of all potential claims arising out of the advice in (1).

  11. (6B)

    ‘non-scheme case’ is a case that would be a scheme case if it were not for the condition in:2

    1. (a)

      CONRED 4.2.2R(6); or2

    2. (b)

      CONRED 4.2.2R(7);2

  12. (7)

    ‘suitability requirements’ are the requirements in COBS 9.2.1R(1) and the common law duty in contract or tort to exercise reasonable skill and care in advising the consumer on pension transfers; and

  13. (8)

    ‘unsuitable BSPS advice’ is BSPS advice that does not comply with the suitability requirements that were in force during the relevant period.

CONRED 3.1.1A G

2The effect of CONRED 3.1.1R(6A) is that a firm which has settled a potential case prior to the consumer redress scheme may only cease to count the case towards the Financial Resilience Assessment in CONRED 3.2 if the settlement amount has been calculated in accordance with the applicable rules and guidance. The FCA reminds all firms that they are required to calculate any offer of redress in accordance with applicable regulatory requirements.

Purpose

CONRED 3.1.2 G

1The provisions in this chapter are 2intended 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. This chapter is not made using the power in section 404 of the Act. However, it is intended to complement the consumer redress scheme in CONRED 4.2

Scope of application

CONRED 3.1.3 R

1 CONRED 3 applies to any firm (including a TP firm) that provided BSPS advice in the relevant period, except in the cases specified in CONRED 3.1.4R.

CONRED 3.1.4 R

1 CONRED 3 does not apply to any of the following:

  1. (1)

    a PRA-authorised person;

  2. (2)

    a firm that is a natural person or a partnership involving one or more natural persons;

  3. (3)

    a firm that is subject to an insolvency order;

  4. (3A)

    a firm that is in a creditors’ voluntary winding up under Chapter IV of Part IV of the Insolvency Act 1986;2

  5. (4)

    a firm that has provided BSPS advice to a total of fewer than 33 members of the BSPS; or

  6. (5)

    a firm that is subject to an asset requirement that has comparable effect to CONRED 3.3.

CONRED 3.1.5 G
  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.

CONRED 3.1.6 R

1For the purposes of this chapter, when determining whether it has provided BSPS advice, a firm must treat both of the following as having been provided by the firm:

  1. (1)

    any BSPS advice given by an appointed representative for which the firm has responsibility as principal; and

  2. (2)

    any BSPS advice given by another person for which the firm is liable (including any BSPS advice that gives rise to a contingent liability on the part of the firm).

CONRED 3.1.7 G

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.

CONRED 3.1.7A R

2Where a firm has advised one BSPS member on transferring multiple BSPS pension benefits (for example, pension benefits deriving from different periods of service), it must:

  1. (1)

    treat this as one instance of BSPS advice when calculating N in accordance with CONRED 3.2.4AR; and

  2. (2)

    aggregate the cash equivalent transfer values for that member when calculating ‘AL’ in accordance with CONRED 3.2.5R.

Duration of application

CONRED 3.1.8 G

2 CONRED 3 has no end date2. However, as a firm deals with potential redress cases (normally under CONRED 4), the cases will cease to count towards N or CL under the Financial Resilience Assessment in CONRED 3.2. Once N and CL are zero and a firm has notified the FCA accordingly, the obligations in CONRED 3 cease to be of any continuing relevance to the firm.

CONRED 3.2 Financial resilience assessment

Purpose

CONRED 3.2.1 G
  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 3.2.2 R
  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 3.2.3 R
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 3.2.4 G
  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 3.2.4A R
  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 3.2.4B G
  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 3.2.5 R
  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 3.2.6 G
  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 3.2.6A R
  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 3.2.7 R
  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 3.2.8 G
  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.

CONRED 3.3 Asset restriction

Purpose

CONRED 3.3.1 G
  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.

Responsibilities of SMF managers

CONRED 3.3.2 G

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.

The asset restriction

CONRED 3.3.3 R

1A firm must not in any way dispose of, withdraw, transfer, deal with or diminish the value of any of its own assets (whether in the United Kingdom or elsewhere), unless:

  1. (1)

    the relevant transaction occurs in the ordinary course of business of the firm; or

  2. (2)

    the firm satisfies all of the following conditions:

    1. (a)

      the firm has previously notified the FCA under CONRED 3.2.7R that it is able to meet claims for unsuitable BSPS advice under its financial resilience assessment under CONRED 3.2.2R;

    2. (b)

      since the notification in (a) was submitted, the firm has not subsequently notified the FCA under CONRED 3.2.7R that it is not able to meet claims for unsuitable BSPS advice under its financial resilience assessment under CONRED 3.2.2R; and

    3. (c)

      the firm has calculated, in accordance with CONRED 3.2.2R, that it will continue to be able to meet claims for unsuitable BSPS advice immediately after the relevant transaction.

CONRED 3.3.4 G
  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 3.3.8R2 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.

Transactions in the ordinary course of business

CONRED 3.3.5 R
  1. (1)

    1The following is a non-exhaustive list of transactions that a firm may treat as occurring in the ordinary course of business for the purposes of CONRED 3.3.3R(1):

    1. (a)

      transactions giving effect to instructions initiated by customers;

    2. (b)

      payments to or other transactions with the firm’s counterparties in the ordinary course of operating the firm’s business and in satisfaction of the firm’s contractual obligations;

    3. (c)

      usual and proper contractual salary payments and proper payments made in connection with obligations owed to employee pension schemes;

    4. (d)

      payment of dividends or drawings that have been approved by the FCA in accordance with CONRED 3.3.6R;

    5. (e)

      payments connected to reasonable legal expenses and other reasonable expenses incurred in relation to obtaining accounting or audit advice; and

    6. (f)

      payments connected to the firm’s tax or regulatory obligations, including any payments of redress to consumers.

  2. (2)

    Where a firm intends to undertake a transaction that the firm considers is in the ordinary course of business, but which is not a type of transaction listed in (1), the firm must notify the FCA in advance under CONRED 3.3.10R.

Payment of dividends and LLP members’ drawings

CONRED 3.3.6 R
  1. (1)

    1A firm may treat a dividend as being paid in the ordinary course of business for the purposes of CONRED 3.3.3R(1) if the firm has obtained prior express consent from the FCA.

  2. (2)

    To obtain the consent in (1), a firm must:

    1. (a)

      notify the FCA by email to BSPSredress@fca.org.uk, including the following information:

      1. (i)

        the value of the proposed dividend(s);

      2. (ii)

        the date on which the firm intends to pay the proposed dividend(s);

      3. (iii)

        the recipients of the proposed dividend(s);

      4. (iv)

        a clear statement of the quantified effect of the payment of the proposed dividend(s) on the firm’s regulatory capital position;

      5. (v)

        a copy of the firm’s latest management accounts; and

      6. (vi)

        an express confirmation that the payment of the proposed dividend(s) is lawful under applicable company or partnership law and insolvency law; and

    2. (b)

      as part of the notification in (1), demonstrate both of the following to the reasonable satisfaction of the FCA:

      1. (i)

        the dividend(s) will be paid in connection with services provided for or on behalf of the firm by a natural person; and

      2. (ii)

        the timing of the proposed payment and the value of the dividend(s) are consistent with the historical pattern of the payment of dividends for equivalent purposes over the immediately preceding 12 months.

  3. (3)

    For the purposes of this rule, a reference to a ‘dividend’ includes drawings paid to a member of a limited liability partnership.

CONRED 3.3.7 G

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.

CONRED 3.3.7A G
  1. (1)

    2As part of the notification in CONRED 3.3.6R, a firm is required to include a clear statement of the quantified effect of the payment of the proposed dividend(s) on the firm’s regulatory capital position. A firm should provide this information by:

    1. (a)

      providing financial forecasts which show the expected change in the firm’s regulatory capital over time; and

    2. (b)

      explaining the impact of proposed dividend payments on these financial forecasts.

  2. (2)

    When quantifying a proposed dividend payment, we expect a firm to consider its regulatory obligations under the threshold conditions and the principles. Dividend payments which allow a firm to increase its regulatory capital over time, and which support the firm in passing the financial resilience assessment in CONRED 3.2.2R over a reasonable time horizon, would support compliance with these obligations.

Transactions not in the ordinary course of business

CONRED 3.3.8 R

1The following transactions must not be regarded as occurring in the ordinary course of business:

  1. (1)

    payments to any connected person, except to the extent that they fall within a category of transaction listed in CONRED 3.3.5R;

  2. (2)

    the making of any capital distributions, dividend payments or payment of drawings, except to the extent expressly permitted by the FCA under CONRED 3.3.5R(1)(d) and CONRED 3.3.6R;

  3. (3)

    the making of any gift or loan;

  4. (4)

    any payments or transfers made as part of any financial restructuring or reorganisation of the firm’s business (whether share or asset based) or the acquisition by the firm of part or all of another business; and

  5. (5)

    the disposal to another person of some or all of the firm’s client files or ongoing income from the client bank.

CONRED 3.3.9 G

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.

Prior notification of other transactions in the ordinary course of business

CONRED 3.3.10 R
  1. (1)

    1Except where (2) applies, a firm that has not assessed that it is able to meet all BSPS claims under its financial resilience assessment under CONRED 3.2.2R must notify the FCA at least 15 business days in advance of:

    1. (a)

      undertaking any transaction that the firm considers is in the ordinary course of business, but which is not listed in CONRED 3.3.5R; or

    2. (b)

      any change to its contracts with connected persons (including both variation of existing contracts and entry into new or replacement contracts) which could result in new or increased payments above the de minimis threshold specified in CONRED 3.3.12R.

  2. (2)

    If a firm needs to undertake a transaction that falls within (1)(a) in an urgent situation, the firm must still notify the FCA in advance by giving as much notice as possible, but the 15-business day period in (1) does not apply.

CONRED 3.3.11 G

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.

CONRED 3.3.12 R
  1. (1)

    1The de minimis threshold in CONRED 3.3.10R is a percentage amount equal to the latest Consumer Price Index annual rate published by the Office for National Statistics at the time at which the change in contract is proposed to occur.

  2. (2)

    In calculating whether the de minimis threshold has been exceeded, a firm must aggregate all connected payments.

CONRED 3.3.13 G

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.

CONRED 3.3.14 R

1The notification in CONRED 3.3.10R must:

  1. (1)

    be made to BSPSredress@fca.org.uk; and

  2. (2)

    contain the following information;

    1. (a)

      an explanation of the transaction or contract change;

    2. (b)

      an explanation of the quantifiable impact on the firm’s financial resilience assessment under CONRED 3.2.2R;

    3. (c)

      an explanation of why the firm considers that the transaction or contract change occurs in the ordinary course of business and is therefore permitted;

    4. (d)

      reference to any comparable historic payments or contract changes which support the firm’s view that this occurs in the ordinary course of business; and

    5. (e)

      in the case of a notification on an urgent basis under CONRED 3.3.10R(2), an explanation of the nature of the urgency and why it has not been possible to comply with the normal 15-business day notification requirement in CONRED 3.3.10R(1).