Financial Conduct Authority  

Advice could be excluded from FSCS protection

Advice could be excluded from FSCS protection

Investment advice could be excluded from Financial Services Compensation Scheme protection under ideas floated by the regulator.

In the regulator’s compensation framework review, published today (December 6), it has asked the industry for feedback on whether the scope of protection should be aligned with other jurisdictions.

This would reduce the FSCS’s scope, and mean that consumers suffering financial losses as a result of the failure of an investment intermediary would not be protected by the compensation scheme.

The FCA said the liabilities in relation to investment advice were “very high”, and would hit £330m over 2021/22.

“There is real and considerable harm suffered by consumers in relation to investment advice and other intermediation activities,” it added.

The regulator said its current view is that a reduction of the scope of FSCS protection could impact the level of confidence consumers have in financial services, and could even influence decisions consumers make in the future about how they transact with authorised firms.

It warned this was in the context of a consumer investment market within which consumers are increasingly responsible for making complex decisions about their financial future, including whether and how they invest. 

“They have a greater choice of investment products and services than ever before and, whilst the increased choice has many benefits, the complexity increases the risk of things going wrong.”

Therefore, the FCA said, it is interested in stakeholders’ views on the impact that this reduction could have.

A potential area of impact could be the consolidation of smaller advice firms as consumers move from using smaller advice firms to using banks and insurance firms as they consider them more resilient. It could also impact the quality of financial services advice, it added.

The FCA proposed that another option could be to exclude protection for certain investment products, leading FSCS protection to be focused on mainstream investment products which are more likely to suit the needs of ordinary investors. The excluded products could include crypto assets, unlisted securities or unregulated collective investment schemes.

However, the FCA said, this includes challenges such as ensuring the scope of excluded products was outlined clearly, and it could be very complex to set up and maintain this list which may prove “contentious”.

It said: “Furthermore, limiting protection in this way could also lead to undesirable outcomes, including whereby an individual, including someone who may be in vulnerable circumstances, could be negligently advised to invest in a high-risk 'excluded' investment and would not be protected under the FSCS, although the activity itself would remain subject to FCA regulation.”

Another issue could be that the change would complicate the availability of FSCS protection, adding to confusion around which products are protected by the regime.

The FCA wants to hear firms' views on these ideas before March 4, 2022.

sally.hickey@ft.com