Financial Conduct Authority  

FSCS compensation limit could be reviewed regularly

FSCS compensation limit could be reviewed regularly

The Financial Services Compensation Scheme limit could be reviewed every three years to ensure consumers are not negatively impacted by rising inflation, under ideas floated by the regulator. 

In the Financial Conduct Authority’s compensation framework review, published yesterday (December 6), the regulator asked for industry feedback on the proposals to review compensation limits.

“The compensation limits are set at a fixed, nominal amount,” the FCA said, adding this meant the relative value of the applicable limit will change over time because of inflation.

“If inflation increases, the protection available from the FSCS will decrease over time.”

If a review were to be introduced, it would be undertaken in reference to specific criteria (which would need to be developed) to help determine what an appropriate amount of compensation would be.

The regulator said it would need to ensure any changes to the compensation limits are clearly communicated to minimise any risk of confusion about what the limits are.

Within the paper, the FCA also suggested individuals considered to be either ‘high net worth’ or ‘sophisticated’ could be excluded from FSCS protection in certain scenarios.

The FCA said it could be argued that these investors might be expected to have the means to absorb losses or take their own private action against a failed firm and therefore should not be entitled to compensation. 

Meanwhile, the FCA has also floated the idea of excluding investment advice from FSCS protection as one way of reducing the burden of the levy - in line with other jurisdictions. 

It said many of the claims driving compensation costs related to historic misconduct by firms in the investment sector, including financial advisers and self-invested personal pension operators, which have subsequently failed. 

Last month, the FSCS forecasted a levy of £900m for 2022/23, as advisers will yet again contribute the maximum £240m.