FCA to consider higher compensation limits for pension claims

In a feedback statement to its compensation review, published today (December 14), the FCA said several respondents called on the regulator to review current limits for claims about pension products. 

The discussion paper last year considered the limits on compensation payable by the Financial Services Compensation Scheme and wanted to explore whether stakeholders considered whether current compensation limits provided appropriate protection.

The current limit is £85,000 for most types of claim covered by the FCA’s rules. 

The City watchdog also asked whether it may be appropriate to introduce a periodic review of compensation limits, to ensure that the limits remain at an appropriate level over time. 

But, in its feedback, respondents who commented on the appropriate level of compensation payable by the FSCS were roughly split evenly between those who considered limits should be increased and those who felt they should be maintained. 

Few respondents suggested that limits should be reduced, the FCA said.

Instead, some respondents highlighted that a material proportion of pension claims dealt with by the FSCS are not compensated in full, and stressed the importance of pension savings for consumers’ financial wellbeing.

From those who called for an increase in limits for claims about pensions, there were mixed views on how much they should go up by, with some respondents suggesting that pensions-related claims should be compensated in full with no limit. 

Others argued that a separate limit for pension claims should be introduced that covers the majority of claims, matches the Financial Ombudsman Service maximum award limit (currently £375,000) or matches the lifetime pensions allowance (currently £1.073mn).

The FCA said: “While we consider that the current compensation limits are set at a reasonable level for most types of claim, we believe that it is appropriate to consider further the protection available for claims about pensions.”

The FCA said its analysis of FSCS data found that in 2021, 30.1 per cent of pension claims exceeded the compensation limit, compared with 6.2 per cent of overall investment intermediation claims falling to the life distribution and investment intermediation funding class. 

Between 2019 and 2021, the number of pension intermediation claims where the value of the claim exceeded the compensation limit increased from 1,477 to 2,461 – pointing to a growing number of customers who were not compensated in full.

The FCA said its work on advice to transfer out of defined benefit pension schemes – particularly in the context of the consumer redress scheme for unsuitable advice to transfer out of the British Steel Pension Scheme – highlights the significant impact that bad pensions advice can have on consumers’ wellbeing. 

“We have seen some cases where individual’s losses total several hundred thousand pounds, meaning that, if the advising firm responsible for the bad advice goes out of business, the impacted consumer would not be able to recover all their losses from the FSCS,” it said. 

"Given this, we think there is merit in looking specifically at whether the increase in the proportion of pension claims that involve losses in excess of the FSCS’s compensation limit seen in 2021 was a short term ‘blip’ or points to a longer-term trend, and whether higher limits for pension claims might be appropriate."

The FCA said it plans to commence a review of the current compensation limits in 2023, particularly to consider whether it would be appropriate to increase compensation limits for certain pension claims.

“As any increase in compensation limits would increase potential claims costs falling to FSCS levy payers, we will carry out the review of compensation limits alongside work to review the current funding classes,” it said. 

Compensation framework review

The FCA’s review was launched following concerns about the increasing cost of compensation liabilities falling to the FSCS, which could create a barrier to firms entering or wishing to stay in the market, potentially affecting the availability of some financial services. 

In the discussion paper last year, the FCA said high-net-worth or sophisticated investors could be barred from claiming compensation through the regulatory channels, that investment advice could be excluded from FSCS protection and that firms could be required to pay a premium on levies for carrying out higher risk activities or selling risky products.

The main theme from the feedback was the importance of firms improving their conduct so there were fewer calls on the FSCS from mis-sold products by failed firms.

Feedback also focused on the need for firms to be more financially resilient to address the underlying causes of high redress liabilities. 

For the next phase of the review, the FCA is planning to: 

• review compensation limits to consider whether they remain at an appropriate level for different types of claims 
• review funding class thresholds to consider whether the class thresholds remain at an appropriate level
• carry out consumer and firm research, in conjunction with the FSCS, to improve the FCA’s understanding of the impact of FSCS protection on consumer decision making, confidence and behaviour, and on firm behaviour and incentives

Sheldon Mills, executive director of consumers and competition at the FCA, said: “We welcome the constructive engagement and feedback which will inform the next phase of this work.  

“We want to make sure the cost to industry for providing vital protection to consumers through the FSCS is distributed in a fair and sustainable way – that the polluter pays. 

“We’re continuing our assertive action to prevent harm from happening in the first place, which should help reduce the levy over time.”

The FCA said it is already taking action to tackle the root causes of high redress liabilities and crack down on problem firms as part of its consumer investments strategy. 

This includes: being tough at the gateway, placing twice as many restrictions on firms to prevent them from promoting or selling certain products and services, and using emergency powers to prevent firms, who advised BSPS members, from disposing of assets to avoid paying compensation.

sonia.rach@ft.com