FSCS calls for review to hike £85k limit for pension claims

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FSCS calls for review to hike £85k limit for pension claims
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The Financial Services Compensation Scheme is calling for the compensation limit of £85,000 to be reviewed for pension claims, with the hope of reducing the gap it has with the Financial Ombudsman Service.

In a paper published alongside its latest outlook today (May 26), the FSCS said it believes the current compensation limits remain appropriate for most products and activities it covers but needs to be higher when it comes to pension claims.

“There is an important exception when it comes to pensions,” it wrote. “In this specific area we believe that the FSCS compensation limit of £85,000 should be higher. 

“We would like to see it reviewed, with a view to reducing the gap between FSCS’s limit and the amount that the Financial Ombudsman Service can tell a business to pay, which is £375,000 as of April 1, 2022.”

This comes as earlier today, the FSCS reduced its levy for 2022/23 by £275mn to £625mn, saying there have been fewer self-invested personal pension provider failures and less complex pension claims.

In 2001, the FSCS became a single compensation scheme and was able to cover £31,700 of the money held by consumers in their bank or savings account and £48,000 for any investment business claims, which includes claims for pensions advice and switching, and the failure of self-invested personal pension operators. 

Since then, the deposit compensation limit has risen three times to £35,000, £50,000, and £85,000. 

Yet the investment limit, which applies to most pension claims, has risen only twice, to £50,000 and then £85,000. 

  “Stabilising the levy and moving into a space where it is sustainably decreasing is a tough ask." - Jay Sheth, FSCS

“Although today both limits are equal, they did not start that way,” the FSCS said. “The deposit limit rise between 2001 and today has out-paced inflation, whereas pension protection is broadly worth the same as it was in 2001.”

“The limit for pensions and investments is now harmonised with deposits and most other FSCS limits, including products like debt management plans where losses are likely to be very small.”

Following consultation in 2018, the Financial Conduct Authority said from April 1, 2020 onwards, the Fos limit would be adjusted in line with inflation, as measured by the consumer price index.

In April, the FCA gave the go ahead for the Fos limit to increase to £375,000.

But the FSCS argued that “no such mechanism” currently exists for its limits, despite there being a strong case for it to be introduced.

“In the 2018 consultation the FCA said that while the number of ‘high value’ complaints is relatively small, there was a risk of very significant financial harm to complainants if they did not receive the full amount of compensation the ombudsman service considers due,” it wrote.

“Complaints above the previous award limit typically involve insurance that protects consumers from a significant loss, advice on long‑term investments that provide an income in retirement, or the investments themselves. We believe the same is true for customers who have a claim with FSCS.”

In December, the FCA published a discussion paper for a compensation framework review, outlining 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.

At the time, the FSCS welcomed the regulator’s compensation framework review and said “something must change”. It urged that 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.

The data and insights by the FSCS published today includes its submission to the CFR. 

FSCS head of policy Jay Sheth said: “Stabilising the levy and moving into a space where it is sustainably decreasing is a tough ask. We could resort to blunt instruments such as lowering compensation limits or removing certain groups of customers from protection, but that would just be masking the real issues.

"Our data doesn’t tell us that measures like these will make any significant dent in the costs today, especially as we know we have harm that has already happened waiting to come through as claims. What we need is reform."

Sheth said this is already beginning, with the future regulatory framework review, the compensation framework review, online safety bill, where progress is being made.

"Focusing on these opportunities and making sure every voice is heard during the consultations and debate is key," he added.

Impact of customers' losses

A key difference between pension claims and other circumstances where the FSCS can pay compensation to customers is the level of "uncompensated loss", where the money it can return to customers is less than the total amount they lost due to the FSCS’s compensation limits. 

For pensions advice claims, including pension transfers, the FSCS said the rise in uncompensated loss has been far steeper, and the average uncompensated loss per customer far greater than the average across all claim types. 

Source: FSCS - The balancing act of compensation

The total number of claims where the customer’s loss was over the relevant limit was almost 3,600 in the 2021/22 financial year.

This number has risen steadily over the past six years, and in that period has resulted in just short of £1bn loss not being paid back to customers as compensation.

Source: FSCS - The balancing act of compensation

FSCS head of resolution Simon Wilson said: “The differences between the types of failure FSCS deals with are stark when it comes to how well we feel we are putting people back on track, and a lot of that is down to our compensation limits. In recent years, most of the deposit failures we’ve seen have been credit unions. 

“Very few of their customers were holding more than £85,000 in their accounts, and even if they had been, there is temporary high balance protection there to help in many cases. 

“When we declare an IFA in default, we see claims where customers have lost hundreds of thousands of pounds, life changing sums of money that we simply can’t return due to the limits in place.” 

The FSCS said it analysed a sample of around 1,200 claims made against two large Sipp operators and looked at the named individuals and firms that customers told said in their evidence.

Of these claims, 71 per involved an introducer who the FSCS believes is unregulated, 18 per cent of the claims involved a regulated introducer, and 11 per cent it was unable to identify. 

FSCS head of stakeholder and public affairs Jonathan Pallant, said: “The ‘advice gap’ is something that worries me. Consumers who neglect or are not able to take regulated advice when making significant decisions about their finances, such as their pension, will likely end up with fewer protections and less chance of recovering any losses through compensation if something goes wrong.

"Coupled with low-levels of financial literacy in the UK, it feels like we should be doing more to look at how poor practice and ‘bad actors’ can be eliminated from the industry, and under-served groups can be helped to access the advice they need.” 

sonia.rach@ft.com

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