Capital Calculations
Capital Calculations
The Financial Conduct Authority (“FCA”) requires Investment Firms (“PIFs”) to quantify and set aside capital resources for “potential redress liabilities” connected to designated investment business. Designated investment business includes regulated activities like advising on investments, advising on the conversion or transfer of pension benefits and arranging deals in investments. Potential redress liabilities mean “unresolved” redress liabilities i.e. when a consumer has made a complaint, where this complaint may give rise to a liability and a decision is pending e.g. from the Financial Ombudsman Service (“FOS”) plus “prospective” redress liabilities – any future exposure that may give rise to a claim by the consumer.
Determining the capital requirement
PIFs that are subject to this new requirement (that excludes sole traders and partnerships) are required to undertake the following steps:
- Step 1 – Estimate the redress amount
Estimate the amount of funds needed to provide redress to each customer if the liability is crystallised (reflecting any professional indemnity insurance in place)
- Step 2 – Aggregate the redress amount for each customer
Add together the amounts calculated in step 1 to calculate the PIF’s total potential redress liabilities to all customers.
- Step 3 – Calculate the potential redress liabilities
Apply a probability factor (the FCA have suggested a probability factor of 28% but that needs to be confirmed) to adjust the figure calculated in step 2. The PIF will report this figure as its capital deduction for redress and deduct it from its regulatory capital.
PIFs will need to undertake a review of the liability of each transaction with the consumer including an estimate of the redress liabilities. The Congruent Calculations™ platform allows users to determine the overall redress liabilities for pension and investment advice in a cost-effective manner using our web-based client portal and to retain the records to update them when required.
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