OpinionJul 31 2015

FSCS risks turning into a ‘protection’ racket

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FSCS risks turning into a ‘protection’ racket
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The Financial Services Compensation Scheme likes to claim it is protecting consumers.

Advisers and providers who have just had their latest demands for levies, with the warning that next time they will have to pay more, increasingly feel that this is fast becoming an entirely different kind of “protection” – the sort portrayed in films by actors like Robert de Niro and Joe Pesci.

Protection and compensation sound comforting in abstract terms, but the funds for them come from decent businesses and, in turn, their customers; making advice and pensions more expensive.

People already don’t take advice when they should – witness the horror stories of consumers giving up valuable DB pensions before April – and they already don’t save enough for retirement. Making these things more expensive does real harm. A better balance needs to be struck.

The FSCS has lost its way and urgently needs to reassess its purpose, aims and funding. The ‘good guys’ are paying for the misdeeds of rogues. Increasing the compensation limits without addressing these serious underlying problems will magnify the problems and, ironically, leave consumers worse off.

The fundamental problem with the FSCS is that the one party that doesn’t pay for financial ‘pollution’ is the polluter himself. That is why it needs to involve a degree of pre-funding: those who might cause problems are then contributing.

The basis on which levies are calculated also needs improving to make them more risk-based, with those more likely to pollute having to pre-fund more.

Unregulated rogues still need pursuing with a lot more vigour all the way to court and potentially jail

A large proportion of the levies over the years have been to do with poor advice and rogue, unregulated peddlers of ropey or fraudulent investments.

While the advice industry has been cleaned up extensively, unregulated rogues still need pursuing with a lot more vigour all the way to court and potentially jail.

Fines from such action should be set, as far as possible, to recover the proceeds of the misdeeds in full and used exclusively to fund compensation. That is ‘polluter pays’ in its purest form, albeit after the event.

In addition to this, the ever-increasing fines imposed on the banks and insurers by the Financial Conduct Authority should be used to fund the FSCS, again strengthening the link between actions and consequences.

It is not realistic for the FSCS to provide unlimited cover – that was never the intention. It provides a safety net, ensuring consumers are not left with nothing.

A parallel might be the Pension Protection Fund, which covers people in collapsed employer schemes. It can provide 90 per cent compensation, subject to a cap set each year. Furthermore, the ceiling is adjustable to take account of the time members still have to make their own efforts to rebuild their funds.

Nor does – or should – the FSCS bail out all consumers. It protects those who stick to the financial mainstream. Leaving the mainstream must come with fair warning but then people have to be held responsible for their own decisions – a principle set out two thousand years ago by the Romans (caveat emptor) let the buyer beware and which still holds today.

The FSCS likes to boast of how much compensation it has paid out. It is in fact making good advice and quality products more expensive and less accessible for decent people. The FSCS needs to reset its compass.

Andy Leggett is head of Sipp business development at Barnett Waddingham.