Summary analysis of CP23/24 and the impact on Financial Advice Firms

This article will assist in understanding how the rules (as proposed in CP23/24) could impact on IFA back-books and business risks where Defined Benefit Transfers have been undertaken.

The new CP23/24 rules will be active in H1 2025.  There are two key outcomes of the proposals (for IFA);

Advice firms are required to set aside an additional capital adequacy (cash amount), equal to any PROSPECTIVE (potential) redress = 28% of any POTENTIAL liability; 

If that capital is not afforded by the firm a V-REC will apply.

We will start with an extract of proposed rules

13.16.4 R For the purposes of this chapter, a firm’s potential redress liabilities include: 

(1) any potential redress liabilities incurred by an appointed representative, for which the firm has responsibility as principal; and 

(2) any other potential redress liabilities incurred by a person other than the firm, for which the firm is liable (for example, under a deed poll). 

Potential redress liabilities 

13.16.10 G A potential redress liability is either 

(i) an unresolved redress liability or (ii) a prospective redress liability. 

Under this definition, IFA = zero unresolved redress liability – no complaints received, no complaints in the pipeline, therefore NO potential liability (as defined under this definition).

This could be reported to the FCA as there are no outstanding complaints or unresolved redress liability.

Prospective redress liabilities

13.16.15 G

(1) PRIN 2A.9.10R(3) requires firms to monitor outcomes to identify whether any retail customers have suffered harm as a result of the firm’s acts or omissions. 

(2) DISP 1.3.3R(1) requires firms to identify recurring or systemic problems by identifying root causes common to types of complaint. 

13.16.16 R A prospective redress liability exists where: 

(1) a firm has identified foreseeable harm that could give rise to an obligation to provide redress or remediation to a retail customer under PRIN 2A.2.5R( see below) or 

(2) a firm has identified recurring or systemic problems in the course of its complaints handling under DISP 1.3.3R that could give rise to an obligation to provide redress or remediation to a customer. 

13.16.17 G (1) A firm should quantify and set aside capital resources for a prospective redress liability as soon as it has identified the foreseeable harm, or recurring or systemic problem. 

This means a firm should set aside capital resources on a precautionary basis, even when it is investigating the specific circumstances of the prospective redress liability. 

PRIN 2A.2.5R – 31/07/2023

If a firm identifies through complaints, its internal monitoring or from any other source, that retail customers have suffered foreseeable harm as a result of acts or omissions by the firm, it must act in good faith and take appropriate action to rectify the situation, including providing redress where appropriate.


13.16.18 R A prospective redress liability ceases to exist once it has been resolved in accordance with the requirements of the regulatory system and there is no realistic prospect of it being reopened. 

13.16.19 G A non-exhaustive list of examples of where a firm may conclude that a prospective redress liability has ceased to exist is set out below: 

(1) The firm has (in accordance with the requirements of the regulatory system): 

  •  investigated the issue; 
  •  made offers of redress or remediation to the relevant customers; 
  •  had its offers accepted; and 
  • provided the redress or remediation. 


(2) The firm has (in accordance with the requirements of the regulatory system): 

  • investigated the issue; 
  • concluded that it is not appropriate to provide redress or remediation; and 
  • explained its decision to the relevant customers.


13.16.20 G goes on to describe that once these are settled, no longer need to quantify and set aside capital resources for these prospective redress liabilities. 

The capital cost is 28% of total potential redress liabilities (which qualify – excluding those which could be regarded as ‘’no longer need to quantify’’, where cases are settled).

As we see it, you have 2 Options available to you

Option #1

Categorise everything within IFA as suitable advice with no foreseeable harm.

Do nothing and wait

No complaints history whatsoever

No ongoing complaints 

The Firm’s potential redress is the communicated to the FCA as Nil


Do nothing and wait and make a case to FCA by calling them all suitable.

The key risk is that the FCA could call the Firm out and ask for a review to be done and instruct/supervise that review.  The Firm then loses control of the process.

Upon that instruction from the FCA then a potential V-REC is applied to the Firm  – or, the Firm has to come up with 28% of the potential redress as a cash amount.

The cost of that cash amount is easily calculated. Let’s say a firm has done 250 Defined Benefit TV’s: 

28% x PI excess (£30k) x 200 = £1,680,000 – this also assumes that this is within any individual excess limits?

Option #2

Take control now.

Review all your cases and take control under your duty of care to clients (Consumer Duty regulations) and conduct a review of your backbook, based on our awareness of FCA’s guidance and experience with BSPS2 (under your duty of care to our own clients in light of learning from FCA BSPS2) and PRIN 2A.2.5R 

Effectively call a full review and REMOVE ALL ‘’foreseeable harm’’/potential redress from your book.

Complete a DBAAT review of each case.

You mirror FCA BSPS2 in your back book and write to every client explaining that you have reviewed the case (done a DBAAT) and declare it as suitable or unsuitable and explain their options (which will be to effectively accept your review and/or go to FOS – as per BSPS2).

We suggest that as guided under 13.16.20 G, you review and settle your cases, which means you no longer need to quantify and set aside capital resources for these prospective redress liabilities, which are settled under a DBAAT review. 


Financial cost of back-book review

Potential redress



We recommend Option 2, for the following reasons:

  1. You take control.
  2. You remove all DB potential redress liability and the risk of a V-REC on your business.
  3. You have the opportunity to access expertise with experience of BSPS2.
  4. You put yourselves in the strongest position possible to defend a ‘nil’ potential redress position with FCA (by effectively replicating BSPS2 approach within IFA) and mitigating/minimising the possibility of a V-REC.

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