FSCS encourages discussion on the FCA’s Compensation Framework Review
FSCS supports the development of a fair protection model which offers the right protection for consumers at a sustainable cost to the industry and believes more needs to be done to ensure the system is fit for the future
The FCA has today published the Compensation Framework Review discussion paper. This paper sets out several questions designed to draw out stakeholder feedback about the compensation framework that FSCS provides to consumers of financial services in the UK.
The discussion is set against the backdrop of a financial services industry that is rapidly innovating, and consumer habits that are evolving at an even greater pace. Broadly, it asks if ‘what’ and ‘who’ FSCS protects today is appropriate. Crucially, with FSCS’s forecast for next year’s levy currently sitting at £900m, a figure which all parties including FSCS agree is too high, it also seeks to review how the costs of compensation are distributed across the industry and if this can be done in a more fair and sustainable way.
FSCS welcomes the review and would like to see a broad and open discussion around potential compensation models for the future, as well as suggestions for solving the problems of today.
FSCS’s own data and insights are frequently shared with the FCA and have helped inform important policy changes in recent times such as new rules to tackle the practice of ‘phoenixing’ and fee caps for claims management companies (CMCs).
Our data clearly demonstrates the need for change, whilst also highlighting some real challenges which need to be considered as part of the wider discussion. A significant proportion of our compensation is paid out in relation to poor financial advice, and 73% of that advice took place 5 years or more before a customer makes their claim. This lag in the system means the FCA’s aim to stabilise the levy by 2025 carries risk.
The different actors at play in our customer’s decision making when they are taking out new investment products is also eye-opening. For FSCS to be able to consider a claim for advice, a regulated firm with the right permissions needs to have been responsible – however, in a recent study of our SIPP operator claims, many of the names we saw mentioned by customers were unauthorised introducers. Not regulated, and not contributing to FSCS’s compensation costs through the levy.
Whilst compensation costs have been rising, the amount of money FSCS has not been able to put back in customers’ pockets has risen too. Last year (2020/21) this equated to £194m, or £68,000 per person that we couldn’t pay simply because of FSCS’s compensation limits. £104m of this or £108,000 per person was against pensions advice and switching claims, where our customers can often be close to retirement with little time to recover their financial situation which they had worked hard to build.
Caroline Rainbird, Chief Executive of FSCS, said:
“Against a backdrop of rising consumer harm driving a year-on-year rise in compensation costs, I believe it is an important time to consider the composition of the compensation framework and whether it still functions in the most efficient and appropriate manner. We are working in a rapidly evolving marketplace and reviewing what and who FSCS can protect through our compensation service is an important discussion to have – both for today and into the future.
“Reducing protection for vulnerable people who have lost what can be their life’s savings, or their chance at a happy retirement, is not something FSCS agrees with. But, reducing harm from occurring and having a framework that enables us to put as many people as possible back on track most certainly is. We have seen the impact the levy has on some firms that make a positive contribution to the UK market. They tell us it is unfair, and in some cases unaffordable. Something must change.
“It is important to note that this review is not looking at how FSCS operates. The team continue to provide the customers of failed financial services firms with excellent service, paying compensation where we are able to do so in an efficient and fair manner. We have faced criticism from some levy payers over the size of their FSCS bill in recent years, but these costs are only a symptom – driven by the root cause of poor consumer outcomes.
“We welcome the timing of the FCA’s discussion paper and look forward to hearing a range of views being presented from industry and consumers alike. I would encourage anyone interested in the future of financial services and consumer protection to put forward their thoughts for consideration.”
The Compensation Framework Review discussion paper and details on how to respond are available on the FCA’s website.
Notes for editors
For more information about the role of FSCS see our Notes for editors page.