The FSA has watered down plans to allow directors of failed firms to claim through the Financial Services Compensation Scheme but is pushing ahead with proposals to pay compensation without fully investigating a claim’s validity.
The regulator published a consultation paper in March on changes to the compensation sourcebook. This is separate to the current consultation on the FSCS funding model review which closes next month.
The FSA put forward a range of measures to enable the FSCS to handle claims more efficiently.
They included extending claim eligibility criteria to directors and managers of the firm in default.
Currently when assessing claims the FSCS has to screen individual claims for claims from directors. The FSA argued by making directors eligible to claim, the claims process will be speeded up.
In its policy statement, published today, the FSA says the majority of the 33 respondents to the paper were opposed to the move, as those responsible for the default should not be able to benefit from compensation.
In response the FSA says: “We understand the concerns that those responsible for the default and others linked to the firm should not benefit from compensation. We appreciate that this is a particularly sensitive issue and have dropped our initial proposal.
“Instead we will provide a limited discretion for the FSCS to treat directors and persons who contributed to the firm’s default as eligible claimants, if excluding them would prevent the efficient performance of the FSCS’s functions.”
The FSA says the FSCS would allow directors of failed firms to be eligible for compensation where it would aid the efficient payment of compensation, the transfer of the failed firm’s business to another firm, securing the issue of insurance policies to replace existing plans, and the payment of life insurance benefits.
The regulator also proposed paying compensation without a full investigation of the claim in cases where the cost of assessing the claim would be disproportionate to the size of the claim itself.
Respondents argued the plans would lead to the FSCS rules being seen as a “charter for claims management companies” and would lead to spurious claims.
But the FSA says the rule contains sufficient safeguards, being that the FSCS can only pay out on claims without investigation where it is reasonably in the interests of firms and costs of investigating outweigh the benefits. The FSA has made this rule change as proposed.
Facts & Figures Financial Planners managing director Simon Webster says: “As soon as it gets out that investors can make a claim without it being properly investigated, it will just be a licence to print money at the industry’s expense. Fairness and justice comes at a price.”