FSA defies majority on FSCS claims for failed firm execs
Regulator waters down plans and opts to give FSCS “discretion” to include directors where it makes process more efficient.
The Financial Services Authority will make directors of failed companies potentially eligible for compensation from the Financial Services Compensation Scheme, despite a majority of respondents opposing the measure.
The regulator had originally proposed extending claimant eligibility to people closely involved with the failed firm, including for example directors and managers of a failed firm, their close relatives, people holding 5 per cent of the firm’s capital or others the FSCS deems at least partially responsible for the collapse.
Although acknowledging that most respondents opposed the measure - and admitting that broadening eligibility could increase the cost of claims - the FSA argued that it was not the FSCS’s responsibility to punish those responsible.
In its policy statement the FSA said: “We agree it is undesirable to pay compensation to people such as directors who may have contributed to the failure of the firm.
“But we believe the FSCS is not the way to sanction those who have contributed to a firm’s failure. We also think it is unlikely that FSCS protection will have a significant effect on the behaviour of directors and others.”
The regulator also clarified that it was not suggesting simplifying eligibility solely in order to speed up claims handling. Rather, changing eligibility is one of several changes meant together to allow the FSCS to handle schemes more effectively.
Instead of extending eligibility to include directors of failed firms and other people who may have been responsible for the problem in the first place, the FSA will give the FSCS “limited discretion” to treat such people as claimants if not doing so would “prevent efficient performance of the FSCS’s functions”.
Arguments against the measure included the idea that those responsible should not benefit from compensation because of potential moral hazard and reputational damage against the FSA and FSCS.
In addition, those opposed argued that verifying eligibility would not significantly extend processing times and that cost savings of £1m could be fully undone by just 80 newly-eligible claimants in the case of investment business.