The Financial Services Compensation Scheme has welcomed the regulator’s compensation framework review and said “something must change”.
In response to the Financial Conduct Authority’s discussion paper published yesterday (December 6), the FSCS said it encourages any effort to establish the right protection for consumers at a cost that is sustainable to the industry.
The paper outlined a number of ideas, including one which said firms should pay a premium on levies for carrying out higher risk activities or selling risky products. Another suggested high-net-worth or sophisticated investors could be barred from claiming compensation through the regulatory channels.
The FSCS said the paper was set against the backdrop of a financial services industry that was “rapidly innovating” and consumer habits that were evolving.
The body urged it would like to see a broad and open discussion around potential compensation models for the future, as well as suggestions for solving the problems of today.
Caroline Rainbird, chief executive of the FSCS, said: “Against a backdrop of rising consumer harm driving a year-on-year rise in compensation costs, I believe it is an important time to consider the composition of the compensation framework and whether it still functions in the most efficient and appropriate manner.
“Reducing protection for vulnerable people who have lost what can be their life’s savings, or their chance at a happy retirement, is not something FSCS agrees with. But, reducing harm from occurring and having a framework that enables us to put as many people as possible back on track most certainly is.”
Meanwhile, the FSCS said it has been sharing data with the FCA which has helped inform important policy changes such as new rules to tackle the practice of ‘phoenixing’ and fee caps for claims management companies (CMCs).
“Our data clearly demonstrates the need for change, whilst also highlighting some real challenges which need to be considered as part of the wider discussion,” it said.
The levy
Last month, the FSCS said its forecast for next year’s levy is £900m, a figure which it labelled as “too high”.
The FSCS re-emphasised that a significant proportion of its compensation was paid out in relation to poor financial advice, and 73 per cent of that advice took place five years or more before a customer makes their claim.
This lag in the system means the FCA’s aim to stabilise the levy by 2025 carries risk.
As part of the paper, the FCA suggested investment advice could be excluded from FSCS protection in line with other jurisdictions.
This would reduce the FSCS’s scope and mean consumers suffering financial losses as a result of the failure of an investment intermediary would not be protected by the compensation scheme.
The FSCS responded: “The different actors at play in our customers' decision making when they are taking out new investment products is also eye opening. For FSCS to be able to consider a claim for advice, a regulated firm with the right permissions needs to have been responsible – however, in a recent study of our Sipp operator claims, many of the names we saw mentioned by customers were unauthorised introducers.
“Not regulated, and not contributing to FSCS’s compensation costs through the levy.”
The body also explained that while compensation costs have been rising, the amount of money FSCS has not been able to put back in customers’ pockets has risen too.
Last year (2020/21) this equated to £194m, or £68,000 per person that it was unable to pay because of the FSCS’s compensation limits.
Of this, £104m or £108,000 per person, was against pensions advice and switching claims, where customers can often be close to retirement with little time to recover their financial situation.
Rainbird said the FSCS has seen the impact the levy has on some firms who make a positive contribution to the UK market.
“They tell us it is unfair, and in some cases unaffordable,” she added. “Something must change.”
She urged it was important to note that this review was not looking at how FSCS operates.
“The team continue to provide the customers of failed financial services firms with excellent service, paying compensation where we are able to do so in an efficient and fair manner. We have faced criticism from some levy payers over the size of their FSCS bill in recent years, but these costs are only a symptom – driven by the root cause of poor consumer outcomes.
“We welcome the timing of the FCA’s discussion paper and look forward to hearing a range of views being presented from industry and consumers alike.”
sonia.rach@ft.com
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