The Financial Conduct Authority has announced plans to stabilise and then reduce major Financial Services Compensation Scheme costs, as part of a wider goal to reduce consumer harm.
Outlining the next phase of its consumer investments strategy today (September 15), the FCA said it intends to stabilise the Life Distribution & Investment Intermediation and Investment Provision funding classes - responsible for the bulk of recent costs.
However, this is forecast to take place by 2025 rather than any sooner. The regulator will then target 10 per cent year-on-year reductions from 2025 to 2030.
The watchdog is working on addressing poor advice, strengthening capital standards and reviewing FSCS funding as part of its plans to focus on reducing the redress bill.
The FCA is also exploring ways to guide consumers towards mainstream, well-diversified products, as opposed to high-risk investments.
The regulator is still reviewing the compensation framework to ensure that it remains proportionate and appropriate, particularly where firms fail leaving behind compensation liabilities for FSCS to address, with plans to publish a discussion paper later this year.
It added: “We want to strengthen firms’ resilience where they make mistakes, but we also need to continue to clamp down on bad actors – and for industry to work with us to strengthen standards and address poor practice in all its forms.”
The FCA said it would consider consulting on changes to capital requirements for non-Mifid firms, including the potential to introduce higher requirements for higher-risk firms. As well as strengthening the appointed representative regime, it will also consider changes to its requirements for firms to hold PI insurance "if appropriate".
“While it’s unlikely that we could ever set capital requirements at a level that would ensure firms could pay for redress, higher capital requirements could be used, for example, to prompt firms entering the market to think carefully about giving advice in high-risk areas,” it said.
The City watchdog also hinted at rethinking the scope of FSCS protection for consumers opting for high-risk investments.
Responding to the plan, Pimfa CEO Liz Field said the regulator needed to be "significantly more ambitious".
"Ultimately, the unsustainable rises in FSCS levies and significant hardening of the PII market are the result of complex drivers ranging from poor firm behaviour through to inadequate supervisory oversight.
"However, it is not clear to us how these can be adequately addressed by commitments to work more closely with industry as the strategy sets out.
"The FCA needs to be significantly more ambitious in setting out a supervisory approach in which harm is identified and acted on quicker before it is able to manifest itself in the market which will, in turn, lead to fewer failures and as a result, increase confidence in the sector ranging from consumers to underwriters.
"To their credit, we believe they are moving in the right direction, but there is much more on this to be done.”
The FSCS currently estimates that its compensation levy costs for the 2021/22 financial year will be £833m, up 19 per cent on 2020/21.
The FCA noted the consumer investments market is responsible for most of these liabilities, with claims arising from the LDII and Investment Provision classes accounting for around 72 per cent of this (£618m).
These liabilities have led to both the LDII and Investment Provision classes breaching their funding limit for the last two years. As a result, firms from across retail financial services are having to contribute to costs being generated by firm failures originating in other funding classes.
The FCA said improving the quality of advice given or the ability of the firm to cover the cost when it does make a mistake can, over time, reduce the burden of FSCS costs.
sonia.rach@ft.com
What do you think about the issues raised by this story? Email us on FTAletters@ft.com to let us know
