FSCS says advisers need safety net, not harness

FSCS says advisers need safety net, not harness

The Financial Services Compensation Scheme is there to protect consumers who receive bad advice, and should be used as a last resort, rather than a “blanket guarantee” for the consumer, stated its chief executive.

In his latest industry blog, Mark Neale welcomed the Treasury and Financial Conduct Authority’s Financial Advice Market Review, pointing out that as the liberalisation of retirement savings takes effect, many more people will need access to good value advice about the options open to them.

He pointed out that the FSCS is part of the solution, because the protection provided gives consumers the confidence to seek out advice from regulated intermediaries.

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“But it is very important to emphasise that FSCS protection is a safety net when things go badly wrong, not an all-purpose safety harness protecting the consumer in all circumstances.

“Crucially, we do not protect consumers against ordinary investment risk. In other words, an investor cannot expect to be bailed out by FSCS because a suitable product didn’t perform as well as expected.”

Mr Neale also stressed that the compensation scheme does not try to second guess the advice provided by IFAs and will only step in where an investor received negligent advice from a firm which has failed.

He explained that the FSCS applies a civil liability test to claims, asking whether a court would have found in favour of the consumer had the claim been made against a trading organisation.

The blog mentioned the fact that the bulk of investor compensation paid out because of negligent advice in recent years has concerned investments in risky and exotic assets, such as overseas property schemes, many of which have come via self-invested personal pensions.

The FSCS’ own statistics, reported earlier in the summer, revealed that payouts for failed life and pensions intermediaries more than doubled from £18.7m in 2013 to 2014 to £35.2m for the year 2014 to 2015 and were dominated by claims relating to advice to transfer into Sipps.

This has directly lead to advisers in the ‘life and pensions intermediation’ category receiving FSCS levies that almost doubled compared to the previous tax year, as that portion of the levy leapt from £57m to £100m.

Mr Neale recounted a call he listened in to where a retired teacher had been advised to invest her savings in property in the Cape Verde islands.

“These are exactly the sort of investors who should have FSCS protection. Such investors have seen all or the bulk of modest retirement savings put at risk because they did the right thing and sought professional advice about how best to invest those funds.

“They received very bad advice which the great majority of responsible financial advisers would not have contemplated.”

He said that this raises the question of whether the FSCS should take a fresh look at the scope of pension protection, pointing out that many more people will now need to take professional advice, but they will find FSCS protection for bad advice limited to £50,000.