Investment advisers could be forced to keep money aside to compensate customers should their advice turn out to be bad under new proposals from the City watchdog.

The Financial Conduct Authority unveiled a plan which would force firms to ensure they are able to pay redress, should it be needed.

The Financial Services Compensation Scheme (FSCS) paid out nearly £760 million to poorly advised customers between 2016 and 2022, the FCA said.

Nearly all of this, 95%, was due to the actions of just 75 firms. The FSCS is a last-minute fund designed to help customers who are left out of pocket. If your bank collapses it will give you back your bank balance, up to £85,000.

The new proposals will affect personal investment firms. A company which does not hold enough capital to meet its liabilities will face rules which prevent them selling off their assets, the FCA said.

“We want to see a thriving financial advice market to make sure consumers can access the support they need from financially resilient advice firms that want to do the right thing,” said FCA executive director of markets Sarah Pritchard.

“Diligent advisers are having to compensate through the levy for the bad advice of their failed competitors. That needs to change. It is important that the polluter pays.

“We want to hear from industry and consumer groups on our proposals. Please do let us know what you think so that we can reform the way the current framework operates to ensure that those polluting the sector pay.”

The FCA said that the rules would create a “significant incentive” for firms to provide good advice in the first place. It would also incentivise them to right wrongs quickly, it said.

The authority added that around 500 sole traders and unlimited partnerships would be excluded from the asset restrictions, as would some “prudentially supervised” firms.

The watchdog will consult on the proposals until March next year.