FCA concerned over drawdown FSCS levels

FCA concerned over drawdown FSCS levels

Consumers need to be made aware of the different levels of compensation offered by annuities and drawdown, the Financial Conduct Authority has warned.

In its October board meeting, the regulator discussed whether the increasing number of people using drawdown to access their pension savings would be aware of the different coverage offered by the Financial Services Compensation Scheme to investment products.

Annuities are fully covered but drawdown products, as investments, are subject to restricted cover.

In the minutes to its October meeting, the FCA said: "This was particularly illustrated by the new freedoms associated with pension products.

"The importance of making information available for consumers in a clear and succinct format was stressed and it was noted that the harmonisation of limits would simplify issues.

"Work also continued with the FSCS to get a more comprehensible document explaining the cover provided."

The board expressed concern that consumers were not aware of the difference in cost between risk-bearing and guaranteed products.

In October the FCA published its plans for how to reform the funding of the FSCS.

Among the proposals the FCA is considering is forcing advisers to put money aside for the benefit of the compensation scheme.

One of the proposals the FCA floated last year was a risk-based levy, with firms paying more if they deal in higher-risk products.

This proposal proved very popular and the FCA confirmed it will be exploring its introduction for higher-risk investment products.

In order to do so, the FCA will require firms to report data in their Retail Mediation Activities Return on the distribution of products which fall within a new category called “enhanced reporting investment”, consisting of investments which are subject to restrictions on retail distribution.