Information about what redress is available to clients if the worst happens has proved hard to find. I will set out Standard Life’s views on the protection afforded by the Financial Services Compensation Scheme and, perhaps more important, whether FSCS claims are necessary at all.
The first point to note is that the FSCS will only pay out when the FSA declares an authorised company in default. The FSCS is a fund of last resort and, where possible, the failed provider’s administrator meets claims in full or in part before the FSCS takes over.
Take a simple product such as a stakeholder or personal pension where investments are in the insurer’s own funds. Assume the FSA declares the provider in default. The FSCS treats stakeholder and personal pensions as insurance products and savers get redress on the first £2,000 of any claim plus 90 per cent of any balance.
The situation is more complicated where insured funds other than those of the pension provider are used. Again, if the pension provider defaults rather than the external fund manager, the saver is protected by the £2,000/90 per cent rule.
If the external fund manager fails, the pension provider and not the saver is regarded as the investor. This is because the provider creates its own insured fund and invests usually in a mutual fund such as an Oeic run by a third-party fund manager. The provider, being owner of the investment, will usually be treated as a “large company” which makes it ineligible to claim under the FSCS.
Despite what appears to be a weakness of external fund links, it is hard to see where the pension provider would not get back their investment in full. The law requires the Oeic manager to hold all Oeic assets safely in the name of a separate depositary. Only where the fund manager has been acting fraudulently, negligently or dishonestly is there a risk that the assets will be less than the collective interests of the investors. The fund firm’s administrators should be able to meet claims in full if it becomes insolvent.
Moving to investments held under self-invested personal pensions, the Sipp trustees can make a claim on behalf of each saver. The Standard Life Sipp, because of the way it is structured, allows the trustee company to claim per investor if required. Where the Sipp invests in insured funds, the rules are the same as for a personal pension.
Where the Sipp invests directly in mutual funds rather than via an insured fund wrapper, the mutual fund is categorised as investment business and protection of up to 100 per cent of the first £30,000 and 90 per cent of the next £20,000 applies. The fund firm’s administrator should be able to meet claims in full without recourse to the FSCS.
When the Sipp invests in UK bank accounts, the FSCS protects the first £50,000 if the bank defaults. Investments in the deposit accounts of overseas banks are protected by the rules of the country in which that bank is domiciled.
There are many other permutations but I hope this gives a flavour of how the rules work. In the case of failed fund managers, FSCS claims are unlikely to be necessary at all.
John Lawson is head of pension policy at Standard Life