The front line of financial harm
FSCS Chief Executive Caroline Rainbird talks about the balance we need to strike to support all our varied stakeholders and the importance of reducing consumer harm.
Safety net. Lifeboat. Guardian angel. All terms I have heard to describe FSCS. However you define us, the role we play in the financial services industry is undoubtedly crucial: we provide a trusted compensation service that helps to maintain public confidence in the financial services industry.
I recently heard someone say that FSCS sits at the front line of financial harm and this really resonated with me. Helping people to get back on track when they have lost money is at the heart of what we do at FSCS, whether it is a hundred pounds or their entire life’s savings.
While I want to focus on consumers in this article, at FSCS we do have a careful balance to strike to support all of our varied stakeholders – whether it is consumers, our customers, levy-paying firms or the wider financial services industry. We recently published a report on this theme, The balancing act of compensation (PDF 4,231KB), which is our contribution to the discussion of the future of financial compensation in the UK. The report is a distillation of our response to the Financial Conduct Authority’s recent Compensation Framework Review.
The human cost of bad advice
A key priority for FSCS is doing what we can to help to reduce instances of consumer harm and it is impossible to ignore the part that financial advice plays in this. When it comes to making financial decisions, consumers’ ability to access advice is a critical part of the mix. I am encouraged to see new measures being implemented to support consumers when they make financial decisions, such as the new requirement on pension providers to refer customers to Pension Wise for free, impartial guidance about pension options.
Many advisers are exemplary and perform an important role in the financial ecosystem, providing valuable advice and measured and appropriate options to people when they are considering their finances. There are, however, a small number of rogue actors and we know from listening to our customers that they do not always get the sound financial advice they need that is appropriate for their personal situation.
Our data backs this up: the amount we pay in compensation for financial advice is rising and around 78% of our claims are currently linked to financial advice, which is truly alarming. We expect these costs to remain high for years to come as most of our customers come to us many years after the harm of poor advice took place.
Sadly we hear heart-breaking stories from many of our customers who have lost substantial amounts of money through bad advice. Some have lost their entire pension pot because they took bad advice to transfer their workplace pension into a riskier self-invested personal pension. Others were wrongly labelled as "high-net worth" or "sophisticated" investors and were advised to invest in opportunities far riskier than their appetite allowed. In fact, 95% of customers who have made a claim with us since 2018 earn a salary of less than £100,000, which is the current definition of a high-net worth individual.
It goes without saying that tackling the issue of poor advice is the right thing to do for consumers, but it also benefits the industry. If we address this root cause of consumer harm, I believe it is one of the ways will be able to sustainably reduce the levy over the long term.
Pension compensation gap
In many cases we are able to return our customers' money but there is a limit to the amount of compensation we can pay. There is a key difference here between pension claims and the other products we can pay compensation for, which is the level of "uncompensated loss". This is where the money we can return to our customers is less than the total amount they lost, due to our compensation limits.
The maximum FSCS can pay for pensions claims where the firm has failed is currently £85,000 per person, while the Financial Ombudsman Service limit for firms that are still trading is £375,000. I firmly believe we need to narrow this gap as it is completely unfair that two people in similar circumstances could get vastly different amounts of compensation just because one dealt with a firm that has since gone bust.
Educating and empowering consumers
Returning for a moment to consumer harm, every day I see how passionate the entire FSCS team is about doing what we can to reduce instances of this harm. We do not have regulatory or enforcement powers but we know that engaging with people to raise awareness of FSCS and educating them about our protection helps them to make well-informed and appropriate financial decisions.
To this end, we regularly run consumer awareness campaigns about our protection, most recently focussing on pensions and investments, areas where we know awareness of FSCS is particularly low. We have developed a series of protection checkers that people can use to check if the money in their bank, building society, credit union, pension or investment is FSCS protected. Empowering people to check their money through these tools means they can quickly find out if they have that FSCS safety net in place if their provider ever did go out of business.
Our podcast series also aims to explain our protection in simple, friendly terms to arm people with the knowledge they need to make informed financial decisions (our recent episode on financial advice feels very topical at the moment).
If people are happier and well-informed when making financial decisions, this naturally translates into more confident investments which, in turn, benefits the wider financial ecosystem. Everybody wins.
I would encourage anyone interested in any of these themes to read our full report here: The balancing act of compensation (PDF 4,231KB).