FCA could boost FSCS drawdown compensation

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The FCA is to consider whether consumers who enter drawdown contracts need greater protection in the event their provider fails.

Currently pension customers have different Financial Services Compensation Scheme compensation levels depending on whether they purchase an insurance product or non-insurance investment.

But in a consultation on reforming pensions regulation, published today, the regulator says it could consider changing the compensation system if it finds evidence the difference in limits is “distorting decision making”.

Under Prudential Regulation Authority rules, consumers will get back 100 per cent of their money if a life insurance contract provider fails.

However, customers who enter non-insurance investments – such as drawdown – can only receive up to £50,000 per failed firm.

The regulator says if it finds customers are making decisions based on this difference, or the difference could lead to “undesirable outcomes” for large numbers of people, it could make changes.

This could include breaking the link between the non-insurance investment compensation and the £50,000 limit for claims against intermediaries.

It has not been suggested the maximum claim against intermediaries – which applies to both insurance and non-insurance products – is changed.

The FCA says: “The question we want to invite views on is, whether in a situation where consumers’ objectives are arguably the same, FSCS compensation limits should also be similar.”

In a blog last week, FSCS chief executive Mark Neale said: “These discrepancies in FSCS protection are confusing for consumers and could potentially distort markets. I hope the forthcoming review of FSCS funding will consider the case for harmonisation, alongside reform of our funding itself.”

Click here for the full consultation document.

Money Marketing first reported on concerns about discrepancies in FSCS compensation for pension freedom customers in October 2014.

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Comments

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  1. I’ve hardly ever done any Income DrawDown and, given the colossal size of the suitability report I’d have to write if I did, it’s not exactly business I’m keen to attract. I’ve just reviewed a client’s With Profits annuity, based on a required smoothed return of 3.14% p.a. and have been very pleased to note an increase on last year of 3.26%. Of course, the annuity could go down should future bonus rates fall below the required rate, but 3.14% is a pretty modest benchmark so the risk is small.

    That aside, how many Income DrawDown providers have failed, with investors having lost all their money? If the investment funds are, as they should be, quite separate from the provider itself, as on a platform, then even if the platform provider were to fail, the investments should be safe.

    Investment returns may not have kept abreast of the level of income being drawn, but I don’t recall any ID providers having actually failed.

    On what evidence is the FCA basing this latest review?

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