Safety net, not safety harness: FSCS and the advice market
28th September 2015
I very much welcome the HM Treasury/FCA review of the financial advice market.
As the liberalisation of retirement savings takes effect, many more people will need access to good value advice about the options open to them to generate an income in retirement.
Access to that advice can make a big difference to the dignity and quality of people’s lives in retirement.
FSCS is part of the solution because the protection we provide gives consumers the confidence to seek out such advice from regulated intermediaries. But it’s very important to emphasise that FSCS protection is a safety net when things go badly wrong, not an all-purpose safety harness protecting the consumer in all circumstances.
Crucially, we do not protect consumers against ordinary investment risk. In other words, an investor cannot expect to be bailed out by FSCS because a suitable product didn’t perform as well as expected.
And we don’t try to second guess the advice provided by independent financial advisers. We will only step in where an investor received negligent advice from an advisory firm which has failed.
FSCS applies a civil liability test to claims which we examine individually on their own merits. Essentially, we ask whether a court would have found in favour of the consumer had the claim been made against a trading organisation.
These are quasi-legal judgements and, in reaching those judgements, we look at the relevant and available evidence bearing on the claim. In debateable or difficult cases we seek the views of outside Counsel and experts. Those views then inform our decision making.
Some of those decisions go in favour of claimants, some against.
That doesn’t mean, of course, that other people looking at the same claim might not reach a different view, but the process which FSCS follows has integrity and is well-controlled.
In recent years, the bulk of investor compensation we have paid out because of negligent advice has concerned investments in risky and exotic assets, such as overseas property schemes. The recent spate of claims to FSCS arising from investments in self-invested personal pensions (SIPPs) have fallen into exactly this category.
For example, I recently listened to a call to our help line from a retired teacher who had been advised to invest her savings in property in the Cape Verde islands!
These are exactly the sort of investors who should have FSCS protection. Such investors have seen all or the bulk of modest retirement savings put at risk because they did the right thing and sought professional advice about how best to invest those funds.
They received very bad advice which the great majority of responsible financial advisers would not have contemplated.
This raises the question of whether – following the Government’s reforms – we should take a fresh look at the scope of FSCS protection for retirement savings. Many more people will now need, and want, to take professional advice, but they will find FSCS protection for bad advice limited to £50,000. The same limit applies to investment products.
By contrast, retirement savings held within long-term insurance products now have protection at 100% of the policy value without limit.
These discrepancies in FSCS protection are confusing for consumers and could potentially distort markets. I hope the forthcoming review of FSCS funding will consider the case for harmonisation, alongside reform of our funding itself.
So FSCS provides important protection for consumers who receive bad advice, but it is a last resort, not a blanket guarantee for the consumer.