FSCS interim CEO: current failure levels are 'still simply too high'

Speaking to FT Adviser, Beauchamp explained that the pensions and advice landscape will continue to evolve – much of which will have relevance to FSCS and the protection it provides to consumers. 

The FCA’s recent consultation on capital requirements for personal investment firms is one example that seeks to reduce the amount of compensation FSCS needs to pay to consumers.

The regulator has proposed a “polluter pays” framework which will require personal investment firms to set aside capital so that they can cover compensation costs.

Any firm not holding enough capital will be subject to automatic asset retention rules to prevent them from disposing of their assets.    

Beauchamp said: "This goal is something FSCS strongly supports, as poor investment advice is still driving large numbers of complex claims which are often costly for us to resolve.

“These costs are passed onto the wider industry through FSCS’s levy, which we know creates a burden on many firms.

“As laid out in the FCA’s feedback statement on the compensation framework review, we also expect further work on our funding classes and associated compensation limits soon.”

Beauchamp said it is an honour to lead the FSCS as it aims to put consumers back on track when they have nowhere else to turn.

“But as much as our service is crucial, we’d rather so many customers didn’t need to come to us for compensation in the first place,” he added. 

“Although some failure is inevitable, the current levels are still simply too high, and continued focus on the root causes of consumer harm across the financial services sector remains a must. 

“FSCS will continue to work with our regulatory and industry colleagues throughout 2024 to ensure our service remains relevant and appropriate for what lays ahead.”

Looking ahead

Beauchamp said depositor protection will remain a focus over the next year, with a compensation limit review due by 2025. 

"As well as the amount of money protected, the PRA has also spoken about the importance of continuity and of people having access to their money as soon as possible in the event of failure,” he said.

“We’ve already been working on enhancing our payment options, to allow for electronic balance transfers in future as well as cheques, and we’ll build on this work during 2024.”

The FSCS said it expects to pay a similar amount in compensation to customers over the next financial year. 

More than 80 per cent of this relates to firms that FSCS has already declared in default, rather than new failures on the horizon.

“While things remain relatively stable on the compensation front, it gives us the opportunity to prioritise important work that ensures FSCS continues to provide a trusted and effective service,” he said.

“Internally, we’re focused on building capability for the future, so that we keep pace with the variety and complexity of claims coming our way. 

“This includes work on upskilling our people, upgrading our technology, and strengthening our processes and governance where needed. This is vital work in ensuring FSCS is future-fit and prepared to handle anything that comes our way.”

Looking back on 2023

Global events continued to have a substantial impact on the economy in 2023, a trend which has persisted since the pandemic began in early 2020, Beauchamp explained.

“Having joined the FSCS in October, it became immediately clear to me that so much of what shapes FSCS’s work is an echo of the broader external environment – and 2023 was no exception” he said. 

Given the amount of time that typically elapses between a consumer experiencing financial harm and a subsequent firm failure that allows a claim to be made to FSCS, many of the customers seen in 2023 are still seeking to address events that happened before this period of instability began.

This is most noticeable in the pensions and investments sector, where claims are often brought for negligent financial advice several years after that advice was given.

A prominent example is the Financial Conduct Authority’s redress scheme for former members of the British Steel Pension Scheme (BSPS) which began in February. 

The changes to pensions redress methodology meant that FSCS had to make substantial adjustments to internal processes to ensure it was prepared to handle claims in line with the new guidance. 

In total, it has now paid almost £72mn to former BSPS members. 

Some advice firms involved in BSPS transfers failed very recently, so the FSCS said it expects to be handling claims well into 2024.

“Financial advice firms such as these made up the bulk of those failing during 2023, continuing the trend of recent years,” he said.

At the time of writing, FSCS had declared more than 50 firms in default during 2023, and said it had progressed some substantial and complex investigations into other firms that have gone out of business and may owe former customers compensation. 

 Although some failure is inevitable, the current levels are still simply too high, and continued focus on the root causes of consumer harm across the financial services sector remains a must. 

“These ‘behind the scenes’ efforts before a firm can be declared in default are often invisible but form a significant part of our work,” Beauchamp said.

“However, it wasn’t all about pensions this year.”

Since the failure of Silicon Valley Bank and Credit Suisse back in March, there has been a greater focus on deposit protection, with FSCS covering £85,000 per person in the event of a bank, building society or credit union failure.

There was discussion in the months that followed about the future of this core part of FSCS’s protection, and whether the current compensation limit is sufficient for consumers and businesses alike. 

Beauchamp said the Prudential Regulation Authority confirmed an extension to the depositor protection rules at the end of March, so that customers of e-money and payment institutions are now better protected by FSCS in the event an underlying bank fails. 

“Despite increased interest in the sector, we’ve had a relatively quiet year in terms of claims – with two Credit Union failures over the summer,” he said.

“These failures affected around 8,000 members and saw FSCS paying out approximately £1.5mn in compensation.”

 sonia.rach@ft.com

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