Financial Services Compensation Scheme  

FSCS chief: 78% of claims linked to advice as compensation rises

FSCS chief: 78% of claims linked to advice as compensation rises
Caroline Rainbird, chief executive of the Financial Services Compensation Scheme

The Financial Services Compensation Scheme boss said 78 per cent of its claims are currently linked to financial advice and this number is rising. 

In an article looking at the balance the FSCS needs to strike, chief executive Caroline Rainbird said the lifeboat scheme needs to support all stakeholders, alongside reducing consumer harm.

“Safety net. Lifeboat. Guardian angel. All terms I have heard to describe FSCS,” she said. “However you define us, the role we play in the financial services industry is undoubtedly crucial: we provide a trusted compensation service that helps to maintain public confidence in the financial services industry.”

Rainbird explained that a key priority for FSCS is reducing instances of consumer harm, arguing that it is impossible to ignore the part that financial advice plays in it.

“When it comes to making financial decisions, consumers’ ability to access advice is a critical part of the mix,” she said. “I am encouraged to see new measures being implemented to support consumers when they make financial decisions, such as the new requirement on pension providers to refer customers to Pension Wise for free, impartial guidance about pension options.”

Many advisers are exemplary and perform an important role in the financial ecosystem, providing valuable advice and options to people when they are considering their finances, she explained.

There are, however, “a small number of rogue actors” where customers do not always get the financial advice they need that is appropriate for their personal situation.

“Our data backs this up: the amount we pay in compensation for financial advice is rising and around 78 per cent of our claims are currently linked to financial advice, which is truly alarming,” she added.

“We expect these costs to remain high for years to come as most of our customers come to us many years after the harm of poor advice took place.”

Many of the FSCS's customers have lost substantial amounts of money through bad advice.

For example, some have lost their entire pension pot because they took bad advice to transfer their workplace pension into a riskier self-invested personal pension.

Elsewhere, others were wrongly labelled as "high-net worth" or "sophisticated" investors and advised to invest in risky opportunities. 

“In fact, 95 per cent of customers who have made a claim with us since 2018 earn a salary of less than £100,000, which is the current definition of a high-net worth individual,” Rainbird said.

“It goes without saying that tackling the issue of poor advice is the right thing to do for consumers, but it also benefits the industry. If we address this root cause of consumer harm, I believe it is one of the ways will be able to sustainably reduce the levy over the long term.”

In May, the FSCS said it had reduced the levy for 2022/23 by £275mn to £625mn, saying there have been fewer self-invested personal pension provider failures and complex pension claims.