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

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

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.

Back in November, the lifeboat scheme had forecast its levy for the year to be £900mn but had cut its levy for 2021/22 to £717mn from £833mn.

Advice firms, which fall under the life distribution and investment intermediation class, will contribute £213.1mn to the levy, a drop of £26.9mn from the original forecast of £240mn in November

Pension compensation gap

In the article, Rainbird also referenced the gap in compensation between the FSCS and the Financial Ombudsman Service.

She explained that in many cases, the FSCS is able to return customers' money but there is a limit to the amount of compensation. 

“There is a key difference here between pension claims and the other products we can pay compensation for, which is the level of "uncompensated loss",” she said. 

“This is where the money we can return to our customers is less than the total amount they lost, due to our compensation limits.”

The maximum the FSCS can pay for pensions claims where the firm has failed is currently £85,000 per person, while the Fos limit for firms that are still trading is £375,000. 

“I firmly believe we need to narrow this gap as it is completely unfair that two people in similar circumstances could get vastly different amounts of compensation just because one dealt with a firm that has since gone bust,” she said. 

Rainbird explained that one way to tackle this is by educating consumers to help them make well-informed decisions.

The FSCS regularly runs consumer awareness campaigns about its protection, most recently focussing on pensions and investments, areas where awareness of FSCS is low. 

“We have developed a series of protection checkers that people can use to check if the money in their bank, building society, credit union, pension or investment is FSCS protected,” she added. 

“Empowering people to check their money through these tools means they can quickly find out if they have that FSCS safety net in place if their provider ever did go out of business.”

sonia.rach@ft.com

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