Prudential rule changes – a way to reduce misselling?

The FSA is keen to understand if the risk of misselling by personal investment firms (PIFs) and consequent consumer and levy-payer detriment can be dealt with by changes to the prudential requirements. In DP07/4 it notes that smaller PIFs (with income up to £3m) employing up to 25 advisers must hold £10,000 of their own funds as capital but this was set in 1994 and may now be too low a figure to lose to discourage unsuitable sales. Anecdotal evidence from firms with more than 25 advisers, and networks, which have to hold capital above a proportion of their last year's expenditure, indicates that they tend to hold considerably more than the regulatory minimum. The FSA suggests that they may be using the excess to meeting valid misselling claims and that their behaviour is affected by the level of claims. PII should, in theory, act to improve selling practices as premiums will rise with the level of claims. However, since the median excess for a single claim is £5,000 and individual redress payments tend to be below this figure, the PII cover, which is written on a ‘claims made’ rather than a ‘business written’ basis, is not often utilised.