The Financial Services Compensation Scheme has warned it is seeing an increase in consumers who have lost more than the total amount of compensation it can provide.
In the lifeboat scheme’s annual report, released today (July 7), the FSCS said the number of claimants with these losses rose 15 per cent last year, leading to £214mn in losses that it was not able to compensate for.
The scheme’s limit is currently £85,000, though the body has recently called for the limit to be raised for pension claims.
Chief executive of the FSCS, Caroline Rainbird, noted the wide-reaching impact of these claims.
“We also cannot compensate for the emotional loss associated with financial harm which can be devastating,” she said.
“Preventing this harm from occurring in the first place remains the best way to address this issue and improve outcomes for consumers.”
The FSCS paid out £584mn in the 2021-22 year, the same amount paid the year before.
However, the claims were higher in value overall, as 66 firms failed in that period, compared to 92 in 2020-21.
The FSCS said the main drivers of compensation continued to be claims in the life distribution and investment intermediation class (LDII), though this had seen lower compensation costs than predicted, and the investment provision and general insurance provision classes.
LDII claims dropped to £263mn from £323mn the year before, largely due to a £53mn reduction in compensation payments to London Capital & Finance claimants, as the bulk of compensation was paid to them in 2020-21.
The levy was provided by 45,227 regulated financial services firms, the same number as the year before, and £13mn of this was used to offset levies.
Rainbird said forecasting the amount needed to pay compensation is “more challenging” than ever due to the uncertain economic climate and the increasing complexity of claims.
“It is these uncertain times that are sadly most attractive to scammers and fraudsters, who exploit anxiety and fear wherever they can,” she said.
“It is also during these times when consumers may be more susceptible to taking bigger risks with their finances and be exposed to choices that might not be right for them.”
She said although the FSCS's work is critical for helping to provide a trusted compensation service for consumers, ideally it does not want to see firms failing and people experiencing financial loss.
“We can only solve the underlying issues that negatively impact consumers, and ultimately the industry, via close collaboration sector-wide.
"In the year ahead, I look forward to working further with our stakeholders and our regulatory partners to continue challenging and addressing the issues that are creating consumer harm.”
Last month, the FSCS cut its levy by £275mn, and it said in its report today that this is down to paying £260mn less in compensation than predicted, as well as £11mn less in related management expenses.