Asset Restriction Rules
New rules come into force for affected firms from 00.01 am on 27 April 2022.
These rules impact firms that advised members of BSPS during 26 May 2016 and 29 March 2018. These rules do not apply to sole traders or partnerships or where, in the relevant period, transfer advice was provided to fewer than 5 BSPS members.
Firms must complete a Financial Resilience Assessment (“FRA”) – initially by the 27 May 2022 and monthly thereafter or more frequently if there is a change in circumstances.
The test is formulated as follows:
C – (N x L x AL) where:
C is the regulatory capital
N is the number of relevant BSPS transfers
L is likelihood that the firm’s advice is non-complaint – assumed to be 46%
AL is the average liability or exposure – assumed to be 16%
There are specific reductions to AL permitted with appropriate Professional Indemnity cover in place.
Where firms fail this test i.e. where the result is negative the restrictions are placed on disposing of, withdrawing, transferring, dealing with or diminishing the value of any of its own assets. Specific transactions of this nature are prohibited where it is deemed not in the
“ordinary cause of business” where other transactions (not in the FCA prescribed list) may require case by case approval by the FCA.
Congruent comment:
The 16% average liability is a “one size fits all” approach by the FCA. Our experience is that the liability can vary significantly between firms. No doubt discussions are taking place now between firms and PI insures not only in relation to the redress scheme but also specifically in relation to these new rules. We think firms (and their PI insurers) will wish to understand
the nature and magnitude of these total liabilities in full using a more calibrated approach given the restrictions imposed by the FCA. Our calculations service – Congruent CalculationTM is designed to assist with the latter.
