WIREDGOV

The Financial Services Authority (FSA) yesterday published a Discussion Paper (DP) reviewing the prudential requirements for Personal Investment Firms (PIFs). The paper discusses options for changing these rules in order to help reduce the impact of any mis-selling by firms in the sector.

Christina Sinclair, Head of FSA Institutional Business Policy, said:

"In line with our principles-based approach it is now time to examine whether the existing requirements for Personal Investment Firms achieve the outcomes we seek. The prudential requirements for other types of firms have been reviewed during the last 10 years.

"This review provides the opportunity to consider how firms and consumers could benefit from a new approach to the prudential requirements. Preliminary industry feedback already supports the view that the current regime can be improved."

The DP suggests that prudential requirements should focus on reducing the risk of a firm causing detriment to consumers, and other firms paying the FSCS levy, by mis-selling investment products. The DP explores options for using capital resources requirements and professional indemnity insurance (PII) to provide better incentives for firms to address this risk. Amongst the options discussed are risk-based capital requirements, and for the insurance industry to link PII premiums more closely to mis-selling risk.

The DP is closely linked to the wider issues covered in the Retail Distribution Review (RDR) and like the RDR will have a six month consultation period. During this time the FSA will actively seek a full and constructive debate with the industry, consumers, professional advisers and trade bodies and will undertake further research on the links between capital resources, PII and mis-selling. The FSA intends to share relevant research findings publicly in early 2008. Detailed proposals for consultation will be published later in 2008 along with proposals from the RDR. Whilst this review will proceed alongside the RDR, reform of the prudential requirements for PIFs could continue separately if that was considered desirable.

Notes for editors

1. Discussion paper DP07/4: Review of the Prudential Rules for Personal Investment Firms.
2. The FSA's Retail Distribution Review was published on 27 June 2007.
3. Personal Investment Firms are broadly those firms which derive the bulk of their business from advising on, and managing investments for, retail customers. The DP reviews the requirements for those firms that fall outside the scope of the Markets in Financial Instruments Directive (MiFID). There are over 5,000 such firms authorised by the FSA. The majority of them are small: 83% have fewer than five advisers.
4. The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; securing the appropriate degree of protection for consumers; and fighting financial crime.
5. The FSA aims to promote efficient, orderly and fair markets, help retail consumers achieve a fair deal and improve its business capability and effectiveness.