Financial Services Compensation Scheme  

The firm that cost mortgage advisers

The firm that cost mortgage advisers

The failure of Fuel Investments was behind 70 per cent of compensation paid by the Financial Services Compensation Scheme against mortgage brokers in the past five years, explaining the recent drop in the levy on those firms.

Statements published by the FSCS last week (July 9) showed some £36m had been paid out in relation to claims against Fuel Investments, accounting for the majority of the compensation bill against the home finance intermediation class.

The £6m paid by mortgage brokers in 2015/16 jumped to more than £20m in 2016/17, cost £15m in 2017/18 and rose again to about £23m in 2018/19.

But the claims against the firm, which failed in October 2015, have now reduced to around £2m, and the cost to the class has fallen from £9.4m in 2018/19 to £5.7m in 2019/20.

This in turn has seen the levy paid by such firms drop to £4m for 2019/20 and to just £1m for the 2020/21 year.

Last week mortgage brokers welcomed the reduction in fees, claiming it would help firms whose capital resources were “more challenging” amid the pandemic.

Claims against Fuel Investments typically related to advice to remortgage residential properties in order to raise funds to invest in high-risk property schemes.

Most clients paid about £10,000 to join the scheme and many were encouraged to switch to interest-only mortgages as part of the deal.

The FSCS has paid compensation for the losses directly caused by regulated mortgage advice which included significant losses arising from the property investments.

Advisers footing the bill for failed, defunct firms has been a long-standing issue in the industry.

The chief executive of the FSCS has pledged the body was working to reduce the levy paid by industry to fund its payouts while chairman of the scheme Marshall Bailey previously hinted to FTAdviser he would welcome a review of its current structure and urged for more discussion over the regulatory set up.

But just last month the FCA revealed it had no plans to revisit the funding structure of the lifeboat scheme, despite its chairman warning earlier this year the system needed a restructure. 

How the FSCS is funded is not set by the scheme itself but by the City watchdog.

Charles Randell, chairman of the regulator, said the system needed to be redesigned so "polluting firms" in the financial sector paid the bill for high risk and unsuitable investments, not "well-run firms" via the compensation scheme.

It echoed what many advisers have protested for a long time — that the ‘good guys always pay’.

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