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Keith Richards: Consumer protection is confused by compensation

It seems the FCA plans to raise Financial Ombudsman Service compensation limits without properly assessing the unintended consequences on the cost and availability of professional indemnity insurance – an area which is already fragile. The irony is that this disjointed approach could end up seeing fewer consumers protected as a result of being left to fend for themselves. The decision is clearly in conflict with the government’s stated objective to increase access to advice.

Few would disagree consumer protection should be a key feature of the market and will provide greater confidence in the public to engage. Yet the proposed changes to compensation limits throw into question whether there is any joined up thinking at all between our regulators and government from a broader public interest perspective.

FCA plans to hike FOS compensation limit by £200,000

The Financial Advice Market Review sought to increase consumer access to advice and was coupled with a pledge to tackle cost and regulatory barriers for new and existing firms to achieve this. The recent concern surrounding defined benefit transfers has sent some PI insurers running for the hills, already leaving advisers facing increased premiums and excesses and, in some instances, no ongoing cover. This latest move by the FCA will only compound the issue.

What is more surprising is that the regulator is alert to the issue. Indeed, it included PI insurance within its FAMR review of Financial Services Compensation Scheme funding, making this latest move even more frustrating.

With the lowest savings ratio since records began, an ageing demographic and the increasing need and demand for advice created through pension freedoms, regulatory focus to support and protect consumer best interest seems somewhat confused.

Raising compensation limits without addressing the current cost of operating, FSCS funding and existing PI insurance challenges is akin to pouring petrol on the FAMR fire. It is time for a joined-up strategy where greater access for the majority is as relevant as compensation for the minority.

Nic Cicutti: Why FOS is right to raise compensation limits

A solution has already been proposed which would fund both PI insurance and the FSCS in a practical, affordable and workable way. Crucially, it is sustainable.

The cost of the FSCS and consumer education could be covered by a relatively negligible few basis point deduction from the entire total of retail funds under management and collected centrally.

If adviser contributions went into the same fund to pool the risk, the current need for PI insurance would be replaced. While excesses would still apply, it could also provide run-off cover, stabilise costs and potentially reduce contributions over time. One thing is for sure: if PI insurers continue to harden their position or, worse, remove cover, it will significantly expose firms and their clients to some drastic unintended consequences.

Erosion of public confidence and trust at such a critical time must be mitigated by pre-emptive action, not reactive compensation reform.

Keith Richards is chief executive of the Personal Finance Society



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There are 5 comments at the moment, we would love to hear your opinion too.

  1. Common sense approaches such as this will never curry favour with regulator ! Too much self interest at stake.

  2. Keith, you are wasting your breath. I used to respond to FSA consultation papers, but they only take notice of who they want to and simply use an responses to cherry pick and justify the actions they want to take. I even took part in APFA’s meetings with David Geale and others at the FSA to discuss bringing back in a longstop ready for RDR which effectively would have kicked in 15 years after a client ceased having an ongoing service for whatever reasosn, i.e. like a car where an MOT was valid for a year and then renewed annually, the same woudl apply with advice on products arranged however far back but ONLY when service was ongoing. Seemed like a good idea to David Geale and he said they’d put it to the board, but after an FOI request it can celarly be seen the decision was political and nothing to do with what was right for either the consumer OR the advise. Much like this latest PI debacle, it will be bad for the consumer, but it is all about olitical face, not what is right for the consumer, adviser, justice or any other justifiable reason other than self interest on the part of politicians and quangocrats at the F-pack.
    I’ve said it before and I will once again (publicly) say it again, they are a bunch of shysters.

  3. @Keith – Now, calling them a bunch of shysters, where does that leave me with regard “Ethics” and my SPS from the PFS? If you refuse to renew mine, the irony is that if no other SPS provider will issue me with one becuase I have called the F-pack a bunch of shysters, they then have to decide whether they issue me with one themselves.
    Am I no longer fit and proper, just for saying they are a double dealing backsliding behind closed doors bunch of shysters?
    Or am I just epxressing what a significant numebr of advisers think abotu our beloved regulator. (there are some good individuals at the FCA, the system is just seriously flawed)

  4. Were the FCA to live up to its claims to make financial markets work well so that consumers get a fair deal, advisers’ levies to the FSCS wouldn’t be going through the roof and beyond. Consider:-

    Protecting consumers

    We secure an appropriate degree of protection for consumers

    Enhancing market integrity

    We protect and enhance the integrity of the UK financial system

    Promoting competition

    We promote effective competition in the interests of consumers.

    Have you ever read an emptier load of hogwash?

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