Financial Conduct Authority  

FSCS: Inconsistent compensation limits a 'challenge'

FSCS: Inconsistent compensation limits a 'challenge'
  Caroline Rainbird, chief executive at the FSCS

The Financial Services Compensation Scheme’s chief executive has said the disparity in compensation awarded by the lifeboat fund and the Financial Ombudsman Service were a challenge as more people are breaching the limits every year. 

Speaking at City & Financial Global’s FCA Consumer Duty Virtual Summit yesterday (November 18), Caroline Rainbird said the disparity between FSCS maximum levels of compensation and the ombudsman's were confusing to people. 

The Ombudsman can award a maximum of £355,000 for complaints while the FSCS is restricted to £85,000. 

“This variation of compensation certainly causes confusion for customers, as potentially one customer could receive a higher award from an ombudsman decision,” she said. 

Rainbird said pensions has seen claims increase by 26 per cent year on year for the last four years and for many the losses were greater than the £85,000 the body can award. 

“In addition and very unfortunately, the number of those customers with losses over our compensation limit increased by 15 per cent last year, highlighting the point around the challenge of inconsistent compensation limits between the ombudsman service and the FSCS,” she said. 

The difference between Fos and FSCS awards is the 'good guys pay' principle - at the FSCS healthy firms pay for the failure of bad actors.

For Rainbird highlighting the causes of the disparity is key, and she stressed the FSCS was working with regulatory and industry partners more closely than ever before on identifying cases of phoenixing, scams and poor and bad practice.

Rainbird said: “Clearly there is much for us all to do and as we as an organisation and as we as the financial services industry move to becoming more data led, we will need collectively to work much closer together with regulatory agencies, industry governance, to really address the root causes of harm in the system."

She explained that during the month of October, the FSCS made 6,000 decisions, bringing the financial year to date for 2021/22 to 46,500 decisions. 

Key claims areas for the month of October included almost 1,700 advice claims decisions, where £31.8m in compensation was paid and just over 4,300 insurance payments with a total value of £71.9m.

Rainbird said: “Despite everyone's intentions and hard work, it doesn't take me to tell you that the FSCS levy continues regrettably to rise. In fact, we've seen increases in compensation costs of around 15 per cent per year between 2017 and 2021.”

Last week, the FSCS forecasted a levy of £900m for 2022/23, as advisers will yet again contribute the maximum £240m. 

The FSCS said a number of self-invested personal pension operator failures expected this year did not happen and were now predicted for the next year. 

As a result the body predicts a higher levy next year but has cut its levy for the current year (2021/22) to £717m, lower than the £833m levy announced at the last forecast in May

Rainbird said: “Whilst the lower levy for us for this financial year may be seen as good news, it's important to note that the reduction is mainly due to failures that were expected for these this year but for a whole host of reasons, Covid impact etc and are more likely to occur next year or beyond.”