You could be forgiven for not noticing, but from 1 October some important new rules governing the way FSCS works came into effect
FSA made the rules after extensive consultation. So the industry has had its say and some of FSA’s proposals were changed to reflect your views.
But I’m acutely aware, talking to industry stakeholders, that there are still plenty of misgivings out there about the changes. There are also some misunderstandings about why they’re being made and how they will be used.
So let me explain why I think these changes are necessary to enable FSCS to provide a better service for consumers and a more efficient one for industry.
Changes should not add to costs
And one point to make right up-front: none of these changes should add to the costs that fall on industry and several should reduce them.
So first up is an important change which will enable us, in tightly defined circumstances, to compensate consumers in full where an underlying investment is illiquid and hard to value. We would then make a recovery when the value finally crystallises.
This is not revolutionary. It’s pretty much what happens now in bank or building society failures where we pay out most savers in seven days and then, as a creditor, seek recoveries for the industry.
Extending this approach to investments will help us deal fairly with investors who have been mis-advised to buy investments which they thought were low risk and liquid but which turn out to be anything but. As we’ve seen with several recent failures, this can leave investors waiting several years for full redress until illiquid assets are finally realised.
In future, we will have discretion in these circumstances to pay full compensation to investors. FSCS will take over their rights and then return the residual value to the industry on realisation. The net compensation paid will be the same as now. So there is not a long term cost to the industry.
Admittedly there may be an opportunity cost here, but ask yourself who’s best placed to bear that cost: the industry or often elderly investors deprived of access to their retirement savings?
Several other rule changes aim to reduce FSCS’ administrative costs which, of course, fall on the industry.
Compensating directors of failed firms
What is probably the most contentious change allows FSCS to relax compensation eligibility to no longer to exclude the directors of failed businesses and their relatives.
Now for the avoidance of doubt, I don’t think directors who have taken inappropriate risks or driven a business into the ground deserve compensation. And most of the time they won’t get it. FSCS will exercise this power wisely, and sparingly.
But there are circumstances when the costs of sorting through thousands of claims to eliminate a small number of ineligible claimants would be hugely in excess of the extra compensation paid. That cannot make sense for the levy.
That’s why we already have this rule in place for fast pay-outs of savers in failed banks. And we might use our new discretion in other circumstances where we can compensate quickly and simply. For example, when we can facilitate the transfer of an insurance book or compensate for a shortfall in client money by making a payment to an acquiring business.
The same principle – a discretion only to be used where administrative costs exceed compensation costs – also applies to other rule changes enabling FSCS to pay compensation without a full investigation or without an application form.
To be clear, FSCS will not use these discretions for high value claims or for claims where there are genuine eligibility issues. But we may use them if, in future, we face a high volume of very low value claims where eligibility has been established. We may use this discretion to dispense with application forms where, following a failure, we have been provided with electronic records which clearly, in themselves, establish eligibility.
In all of these cases, the focus will be on helping to reinforce consumer confidence and cost-efficiency. So please be reassured: FSCS is perfectly clear that we should not exercise any discretion in a way which increases costs to the industry. Most of these changes will, in practice, enable us to deal with claims more efficiently and at lower cost to the industry.
And, as always, we shall always explain what we have done and why we have done it so that the industry and its representatives can hold us to account.