In July this year, the Investor Compensation Schemes Directive was amended by the European Commission to encourage consumer confidence in the financial market following the financial crisis.
Amendments included increasing the compensation from £20,000 to £50,000 per investor, quicker payouts, the provision of clearer information about the protection offered and the setting of a pre-funded minimum target fund level.
As a result of these amendments, the FSA has also proposed changes to the Financial Services Compensation Scheme that will most likely increase the compensation fund to provide faster and more substantial payouts and simplify the operation of the scheme.
The suggested changes to the FSCS are aimed at guaranteeing protection and compensation for more individuals and small businesses and should also provide faster payments.
One change has already come into force to increase customer awareness. From January 1 this year, firms have been required to inform all customers who are eligible or are likely to be eligible to claim for compensation of the existence of the FSCS and the level of protection it offers customers.
A further amendment now means that firms will be required to inform their customers of any other trading names under which the firm operates so that customers know the level of protection they are entitled to.
From December 31 this year, further changes will be implemented that will affect individuals as well as businesses.
Individuals and small businesses will benefit from the rules that state compensation will be paid out within a target of seven days and all payments within 20 days, a requirement under the Deposit Guarantee Schemes Directive (DGSD).
A further change will be the way in which payments are made under the FSCS.
Currently, if a depositor has any debt or loan outstanding to the same firm with which their savings are kept, these will be deducted from their savings before any compensation is paid. The proposed change is for all payments to be made on a gross basis, meaning that a depositor’s deposit is safeguarded if their savings and loans are with the same firm and their debts will not be deducted from their savings up to a limit of £50,000.
There are also proposals to change the way in which the payment of compensation is calculated. Payments will now be worked out as at the date of default.
Overall, the FSCS will be expanded so that more individuals are eligible.
For example, with recent defaults of financial institutions such as Keydata, an investment firm that collapsed in June 2009 when it emerged that a significant portion of its Isa products were not Isa-eligible, the FSCS levy has had to be significantly increased.
As a result of the financial crisis, more customers are in need of the FSCS, which has had to adapt to the climate of the market. This, in turn, has made more customers eligible as the defaults of financial institutions such as Keydata are greater.
A significant change from December 31, 2010 will be that all deposit-takers have to have a single customer view (SCV) ready and available for inspection within 72 hours of a request from the FSA. SCV is defined as a “single consistent view of an eligible claimant’s aggregate protected deposits with the relevant firm which contains the information required by Comp 17.2.3(R)”.
This means that in order to successfully regulate and protect depositors, a complete table with details of all the depositors must be ready for inspection to regulate the number of customers each depositor has and how much money is deposited with them at any time.
This all sounds straight-forward but, as is often the case, the rules and guidance for classifying customers eligible for a straight-through payment is not always clear.
The changes will offer more certainty for consumers in compensation payouts and the security it then provides due to the depositor’s deposit being ringfenced (if their savings are with the same firm).
When institutions are recovering from the downturnin the market, contributing substantial amounts of money to a protective fund can only serve to increase pressure
There will also be greater protection from the SCV scheme. By having this information readily available for inspection, the FSA is able to closely monitor the number of customers per deposit-taker and consider how much money is at risk should any failings occur.
The proposals will allow smaller businesses and individuals to benefit from the FSCS and continue to participate in the market, when in the past the consequences would have been more severe as a result of unforeseeable risks.
But though the changes will protect consumers, there will undoubtedly be additional strain placed on banks.
As the European Commission is proposing to enforce pre-funding with the DGSD, there will be a further requirement for banks to have a protective fund in place.
In these difficult times, when institutions are recovering from the downturn in the market and assessing the impact of minimum capital requirements under Basel III, contributing a substantial amount of money to a protective fund can only serve to increase pressure.
As an EU directive, the member states do not have a choice as to whether they implement it nationally or not.
It is to be hoped that the FSA is using its resources to assess the impact and the possibility of co-ordinating in offering a phased approach, assessing impact in conjunction with Basel. But ultimately, the FSA’s hands are tied and banks will have to find a way to create this protective fund.
As a result of the changes, IFAs have expressed concern that they will be forced to contribute more to the FSCS to aid other financial institutions offering products with high risk, little security for the customer and which may not even deal in the same market they are engaged in.
For example, the recent collapse of Keydata caused uproar when it was established that IFA firms would have to pay an interim levy of £70m to cover the failings of Keydata, Pacific Continental and Square Mile.
Another recent example Wills & Co. So far, around 1,400 customers have complained about the failed stockbroker and the FSCS has placed the company in its investment intermediation sub-class for which IFA firms have to contribute for the compensation.
As is usually the case, it is the actions of a few that have an impact on the majority.
Perhaps we do need a stronger regulatory environment but if that is not policed well from the outset, then it is the business of the many that ultimately pays the price.
Suzanne MacDonald is partner and head of financial services regulation at TLT Solicitors