An update to the FCA's "polluter pays" framework – accountability for harm caused to consumers.

The Financial Conduct Authority (the FCA) has issued updated guidance on its "polluter pays" framework. In an update published on 14 January 2025, the FCA provided further information on the framework, which could lead to firms compensating consumers when they provide poor advice, products or services.

The polluter pays framework has a number of core aspects, designed to ensure that regulated firms address liabilities caused by their actions:

• Shifting liability: Moving away from solely focusing on whether firms followed specific rules towards examining the actual harm caused to consumers.
• Accountability for outcomes: Firms can be held liable for consumer harm even if they did not intentionally cause it.
• Preventing harm before it happens: Encouraging firms to proactively identify and mitigate risks that could lead to consumer harm.
• Stricter liability: Firms may be held responsible for consumer harm, even without demonstrating deliberate wrongdoing.
• Focus on consumer outcomes: The primary focus is on the impact upon consumers, not just technical compliance with the rules.
• Enforcement action: The FCA will use its full range of enforcement powers, including fines, public censure and even the withdrawal of authorisation to deter and punish firms that harm consumers.

The FCA's update on 14 January 2025 provides further guidance for firms on meeting their redress responsibilities under the "polluter pays" framework. The FCA outlined six main examples of "polluting" behaviours, including:

• Basic Phoenixing: A firm shutting down and a new firm taking its place, leaving behind unresolved liabilities.
• Lifeboating: Key personnel leaving a firm before liabilities are addressed, leaving consumers without recourse.
• Fronting: A firm appearing to be independent but being controlled by another entity.
• Sale at an undervalue: A firm sells its assets below market value and that sale impacts its ability to cover its actual or potential liabilities.
• Restructuring: Changing the corporate structure of the group to isolate liabilities and protect assets.
• Proceeds of sale not applied to redress: A firm has funds available to it from the sale of an asset or assets, and has potential or actual redress liabilities, but those funds are not used to address those liabilities.

The update aims to ensure that firms prioritise good customer outcomes to ensure the integrity of the market is not undermined by those that engage in "polluting" behaviour. In accordance with the Consumer Duty, firms must act in good faith, avoid causing foreseeable harm and enable and support retail customers to pursue their financial objectives.

The FCA has said that firms should take "reasonable and verifiable" steps to ensure that there is provision for any potential or actual redress liability. Firms should assess the risk of advice given by conducting "robust file review and ongoing reviews of past advice". Firms should not distribute assets when there are potential or actual redress liabilities unless there is already provision made for the same. We do not yet have clear guidance from the FCA on what it believes is an appropriate level of asset retention.

Firms can expect increased scrutiny from the FCA regarding their risk management practices and consumer redress processes. Implementing robust compliance programs and addressing potential consumer harm can be a timely and costly exercise. However, "polluting" behaviour can significantly damage a firm's reputation, impacting customer trust and business relationships. It is therefore important that firms are aware of "polluter pays" framework and the update and ensure compliance with the same. This may prove to be a challenging exercise and firms may need to seek expert advice on how to comply with the rules.