FSCS exists to compensate people when financial services businesses fail. Right?
Right enough, but far from the whole story. That’s because compensation is not an end in itself; the promise of compensation is one important contribution to financial stability. That promise ensures that financial services businesses can fail safely without detriment to consumers and without sparking a contagious panic.
This means that FSCS is an important part of the wider resolution arrangements for failing banks, building societies, credit unions and insurers. And it also means that how we deliver compensation matters almost as much as the compensation itself.
Put yourself in the position of a depositor in a failing bank. It’s reassuring to know that your savings are covered up to £85,000, but not much good to you if it takes days or weeks to get those savings back to you. There are mortgage payments and bills to meet meanwhile.
Or imagine yourself receiving an annuity from a failing life assurer. It’s reassuring to know that FSCS covers insurance policies, but you also want to be sure that your pension will continue to be paid on time and in full. It’s probably your main source of income.
That’s why we in FSCS very much welcome the consultation papers on resolution arrangements (deposits and insurance) published by the Prudential Regulation Authority (PRA) on 6 October. These build on our current arrangements such as seven day payout (which the rest of Europe is now adopting and FSCS has had in place for some time). We think the PRA’s proposals will significantly strengthen our ability to compensate consumers promptly and effectively.
Let me explain why.
Take deposits first.
The headline making proposal is, undoubtedly, the strengthening of FSCS protection to embrace what are known in the trade as temporary high balances up to £1 million– the proceeds of house sales and so on.
This is certainly very welcome and will reassure people.
But for the great majority of people of more significance will be the much less noticed proposals to facilitate continuity for people’s accounts by making it easier to transfer an account from a failing firm to another provider.
This is paramount to ensuring that, even in the event of a failure, people do not lose access to their savings for more than a few hours. It is similar to what FSCS did in when Bradford and Bingley failed in 2008. So there is little or no disruption to direct debits; little or no interruption to salary payments; continuing access to cash through ATMs. In essence, it helps people to get on with their lives without financial interruption.
The key to this change are some proposed amendments to firms’ single customer view files (SCVs) - to identify separately FSCS protected and unprotected deposits, for example - and a requirement to produce a SCV file within 24 hours instead of 72 hours as now.
We recognise these changes will make additional demands on banks, building societies and credit unions and look forward to hearing their views. The changes however, if carried through, will greatly strengthen our arrangements for resolving failing firms and protecting consumers. That’s good news for consumers and for the industry in terms of public confidence in financial services.
The same thinking underlies the PRA’s proposals on policyholder protection.
At first sight, the scope of FSCS’s protection is already generous: 90% without limit for most insurance policies; 100% for mandatory insurance (such as car insurance).
Yet, pause for a moment to consider the impact of these rules in the unlikely event of a life assurer failing.
It would mean FSCS immediately cutting pension payments by 10%. It would mean that people’s cover for death or incapacity would also fall commensurately. These represent big and irreversible impacts on people’s lives and plans.
And these policies, let’s remember, are often extremely long-term. They are often taken out many years in the past when the failure of the provider could not have been foreseen and with no easy or cheap option to transfer to another firm.
So we welcome the PRA’s proposal to increase to 100% FSCS protection for income and protection life assurance products. This makes much sense for the Scheme and for consumers.
There is, of course, much more to the PRA’s suite of consultation papers than the few issues I have highlighted. Please do read them.
They make an important contribution to a resolution regime which will not just enable FSCS to compensate consumers, but also to give savers and policyholders the confidence which is essential to stability.
The Financial Conduct Authority website includes a searchable database of all firms authorised and regulated by the FCA and the Prudential Regulation Authority (PRA).