Where an FCA-regulated firm is exposed to a material redress liability — whether from a confirmed past-business review, a developing supervisory engagement, or an internally-identified conduct issue — the question is not only what the liability is but how it sits against the firm's financial resources. Capital adequacy is the regulatory framework within which the answer matters. Projecting the cost of remediation is the actuarial exercise that produces a number the board, the regulator, and the firm's own risk function can rely on. The note below sets out why redress liability is a capital-adequacy question, what projection involves, and where the discipline tightens against board-reporting and ICAAP requirements.
The first point to be clear about is that a redress liability is, for a regulated firm, a financial obligation that has to be funded out of resources the firm holds. Where the firm's resources are constrained — whether by the size of the liability, the firm's capital position, or the timing of when redress payments become due — the redress liability moves from being a conduct issue to being a prudential one. The FCA's threshold conditions require regulated firms to hold adequate financial resources; significant redress liability that has not been provisioned against those resources is a direct threshold-condition issue.
This sits on top of the firm's specific prudential regime. Different categories of FCA-regulated firm have different capital requirements: investment firms under MIFIDPRU, insurers under Solvency II, banks under CRR/CRD, friendly societies under their own regime. Each regime has its own way of capturing redress liability in the regulatory capital calculation, but the principle is consistent: redress that the firm is committed to paying, or that the firm has identified as likely to become payable, has to be reflected in the firm's capital position.
Why redress liability is a capital-adequacy question.
The capital-adequacy framing of redress is distinct from the calculation framing. The calculation question is "what is the redress amount due to each consumer?" — addressed by the methodology under FCA DISP App 4 and the firm's calculation platform. The capital-adequacy question is "what is the projected aggregate redress liability, and how does that sit against the firm's resources?" — a different exercise with a different audience.
The audience matters. A calculation under DISP App 4 is, in the first instance, a deliverable to the consumer (the redress amount the consumer is owed) and to the regulator (verifying that the methodology has been applied correctly). A capital-adequacy projection is a deliverable to the firm's board (so that the firm's strategic and capital decisions can be made with the liability in view), to the firm's auditors (so that financial reporting reflects the liability properly), and to the regulator (separately from the per-case redress calculations, in the firm's prudential reporting and supervisory engagement).
The actuarial methodology that produces a capital-adequacy projection is also distinct. The DISP App 4 calculation is per-case and prescribed; the capital-adequacy projection is aggregate and judgemental, drawing on the underlying calculation chain but adding layers of estimation, scenario analysis, and discount-rate treatment that are not part of the DISP App 4 prescription. The projection is forward-looking in a way the per-case calculation is not.
What projection involves.
A capital-adequacy projection for redress liability typically has three components. The first is the central estimate: the firm's best estimate of the aggregate redress liability given what is currently known about the affected population, the suitability-assessment outcomes available to date, and the per-case calculation methodology. The central estimate is not a forecast in the predictive-modelling sense — it is the actuarial expected value of the liability under the firm's current best estimate of the inputs.
The second component is the scenario range. Around the central estimate, the projection has to capture a range of plausible outcomes: cases where suitability assessment produces different unsuitability rates, cases where the methodology is applied to different population definitions, cases where settlement timing differs from the central assumption. The scenario range is what gives the projection its meaning to the board and the regulator — the central estimate alone is a point estimate without uncertainty quantification; the range communicates how much the liability could move under different but reasonable assumptions.
The third component is the time profile. Redress liability does not crystallise as a single payment at a single date; it crystallises as a stream of payments over the period the firm is running the remediation programme. The projection has to capture not just the aggregate liability but the schedule of when it will be paid — which matters for the firm's liquidity position, for capital adequacy at each reporting date in the remediation window, and for the discount-rate treatment that the firm applies when capitalising the liability for prudential or accounting purposes.
Scenario modelling: what's plausible, what's worst-case.
The discipline behind scenario modelling for redress liability is that the scenarios have to be principled rather than arbitrary. A worst-case scenario is not "the largest plausible number we can imagine" — it is the largest liability that follows from a set of input assumptions each of which is itself plausible. The methodology question is which inputs the firm is varying, why, and over what range.
The conventional inputs to vary are: the unsuitability rate within the affected population (what proportion of cases will the suitability assessment identify as warranting redress); the population definition itself (whether the population extends only to confirmed cases or to a broader perimeter); the calculation-methodology version (where DISP App 4 changes are in flight, which version applies); the discount rate used to capitalise the liability for accounting or prudential purposes (where this is at the firm's discretion); and the settlement timing (whether redress will be paid quickly or over a multi-year remediation window).
For each input, the firm chooses a plausible range. The central estimate sits at the firm's best-estimate value for each input; the upside scenario uses the lower-liability assumption for each; the downside scenario uses the higher-liability assumption for each. The discipline is to be transparent about which inputs are driving the range — not to produce a single headline range without disclosing the assumption set behind it.
Worst-case scenarios in this framework are not predictions; they are the firm's quantification of how far the liability could move from the central estimate under combined adverse assumptions. The regulator and the board need this quantification not to use it as the planning number, but to understand the tail of the liability distribution — the contingency that has to be priced into the firm's capital position and the firm's risk management.
ICAAP and financial-resources implications.
For firms subject to ICAAP (Internal Capital Adequacy Assessment Process) under the prudential regimes, the redress projection feeds directly into the capital assessment. The ICAAP requires the firm to identify material risks, quantify them, and demonstrate that the firm holds capital adequate to cover those risks under reasonable stress. Redress liability is a material conduct risk for any firm with significant past-business exposure; the projection is the quantification.
The methodology question for ICAAP purposes is how the central estimate and scenario range translate into the capital number. Practice varies by regime, but the principle is consistent: the firm's capital position has to be adequate to absorb the redress liability under stress, with stress defined consistently with the broader stress-testing framework the firm applies. Where the redress projection is small relative to the firm's capital base, this is straightforward; where it is large, the ICAAP exercise becomes a significant input to the firm's strategic position.
Financial-resources adequacy under the FCA threshold conditions is a parallel question. The threshold conditions require the firm to hold financial resources adequate to its activities; redress liability is part of the activity profile for any firm exposed to past-business conduct risk. The projection is what the firm uses to demonstrate adequacy — or to identify a shortfall and address it through capital injection, business adjustment, or supervisory engagement.
Board reporting and disclosure.
Board reporting of redress liability is its own discipline. The board needs the projection in a form that enables the board's strategic and capital decisions — not a per-case calculation log, but an aggregate view with the central estimate, the scenario range, the time profile, and the assumptions behind the projection clearly stated. The reporting discipline is that the assumptions have to be transparent: the board cannot make a decision on the projection if the inputs driving it are opaque.
External disclosure adds another layer. Where the firm's financial statements have to reflect the redress liability, the IFRS or FRS treatment depends on the recognition criteria for provisions — whether the liability is sufficiently probable and sufficiently estimable to require provisioning, or whether it sits as a contingent liability with note disclosure only. The projection methodology has to be robust enough to support whatever recognition treatment the firm's auditors agree with the firm.
For supervisory engagement, the projection is what the firm uses when discussing the redress exposure with the FCA. The FCA's supervisors are interested in the firm's understanding of its own liability, the methodology behind that understanding, and the firm's capital position relative to the projection. A projection that has been properly built, with documented assumptions and a defensible scenario range, supports a different kind of supervisory conversation than one that has not.
The methodological point is that capital adequacy and per-case redress calculation are different problems with different deliverables, but they sit on the same calculation chain. The per-case calculation under DISP App 4 produces the redress amount due to each consumer; the capital-adequacy projection takes that per-case methodology and applies it at population scale, with aggregation, scenario analysis, and time-profile modelling layered on top. The firm's position on this is that both deliverables are derivable from one calculation platform — the per-case calculation receipts and the population-level projection share the same underlying methodology, the same audit-traceability standard, and the same senior actuarial judgement responsible for the output. What the board sees in the projection is what the regulator sees in the per-case calculations: a methodology applied consistently, with the working visible.
For the firm’s productised FCA-regulated redress and remediation work — including population-scale projection support for board reporting and ICAAP submission — see Redress & remediation. For supervisory-engagement support around the projection, see Regulatory engagement.
Last updated May 2026.