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FSCS chief: Scrapping £50k payout limit will help advisers

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Financial Services Compensation Scheme chief executive Mark Neale says removing the £50,000 compensation limit for poor advice could encourage more consumers to use advisers.

In a blog last month, Neale argued that protection for bad advice needed to be harmonised with retirement savings held in insurance products to give consumers more confidence in the system.

There is currently no limit to compensation available for retirement savings held in insurance products, allowing consumers to reclaim 100% of their losses if an insurer or provider goes bust.

However, if an advice firm enters administration, the lifeboat fund can only pay out a maximum of £50,000 to anyone mis-sold investments.

Speaking to Money Marketing this week, Neale defended his call to remove the £50,000 limit.

He says: “We know that one of the things that deters people seeking advice is how much they claim back on the advice if the advice turns out to be bad. Our research shows that very clearly. The FSCS in that respect is part of the solution.”

Neale adds the market would also benefit from greater simplicity.

He says: “The position at the moment is an unsatisfactory one. We now have people at retirement age with much greater freedoms about how to use their retirement savings, but facing very different levels of FSCS protection depending on what they do.

“If they buy an insurance wrapped product like an annuity they do have unlimited protection. If they go and seek advice – which is what we want them to do after all – they only have protection up to £50,000. Investment products are only up to £50,000.”

“The point we have been making – and I’m not sure it should come as a great surprise – is we need to look at that in the context of the new retirement savings because it is not simple for consumers.”

The way the FSCS is funded is currently being reviewed by the FCA, which is due to report by the end of the year.

Neale says there is no front-runner proposal for reform, but says he would like to examine professional indemnity insurance after the review.

He says: “I don’t think any particular issue has gained or lost momentum. The issues are still the ones we have discussed in the past.

“From my perspective we need to look at PI. It’s not doing the job it should be.”

The Financial Advice Market Review recommended the FCA use the FSCS funding review to decide whether or not a separate review of the PI market is warranted.

Neale adds: “I don’t think we have seen anything particularly new that would change my view. It remains the case that many PI policies are simply not providing the protection they should.”

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Comments

There are 25 comments at the moment, we would love to hear your opinion too.

  1. It is a shame you did not ask him about the FSCS Review and the possible implications of the Government changes to the definition of advice and how that will impact on levies. “Protection for bad advice” but what about poor guidance which forms part of poor advice…

  2. I think there should be protection against the failure of a high credit rated bank such as Lehmans. Structured plans should have proper protection against the collapse of a counterparty.

  3. Neale has failed to understand the purpose of his own body and the distinction between a product and advising someone to invest in a product. If you receive bad advice to invest in an insured product, your payout is still capped at £50,000 if the adviser goes bust. To compare the limit on insurance with the limit on advice is complete apples and oranges.

    What he is proposing is basically open season for scammers. Find an “adviser” who’s managed to get FCA authorisation and is willing to flog you a building site in Cape Verde or a cryptocurrency pyramid scheme. If somehow it takes off, you pocket the proceeds. If it doesn’t, you complain and get all your money back.

    The £50,000 cap is one of the few bulwarks the UK’s broken financial compensation system has against moral hazard.

    It is an anomaly of the definition of “long term insurance” that certain investment products are covered as “insurance” products at all. Annuities and actual insurance contracts (i.e. life or home insurance) should be covered without cap in order to make long term insurance viable and attractive. Investment bonds and personal pensions, on the other hand, should be capped at £50,000, same as unit trusts and SIPPs.

  4. Can we introduce a salary cap of all FSCS personnel too of £50,000 at the same time…! This idea that ‘it will hep advisers’ is bunkum and the cynic in me imagines that a bigger pay-out and bigger levies will instead create a bigger justification for a bigger budget. I don’t think people are dissuaded from or persuaded to invest because there is or is not a £50,000 cap as at the moment.

  5. Paying ever bigger FSCS levies thanks to failed regulation will help our business? Er, no it won’t Mark. It will just increase the moral hazard and our costs. Either this guy is the world’s worst spin doctor or, if he really believes his own spiel, he is delusional.

  6. This man lives in his own little dream world. So now the good firms, who always pay for the bad ones, will be having their levies further increased. How will this help advisers? By telling potential clients that they need take no responsibility for their own actions as that nice FSCS will ensure they get all their money back even if they make stupid decisions? Come on!!

    How does this chime with the latest issuing from the FCA about Caveat Emptor?

    This man’s obstinacy knows no bounds. When tackled face to face about a product levy the fatuous responses and excuses he comes up with can make a strong man weep. It would appear that this career bureaucrat has never run a business or been responsible for making a profit. He can sit there smugly pontificating with his £300k salary, not giving a fig about those actually contributing to GDP.

    • Harry

      That is how this country is now run. You create the company you take the risks but the be Bureaucrats tell you what to do, as you say on outrageously inflated salaries paid by hard-working businesses.

  7. A publishable response eludes me.

  8. So it is the FSCS limit that prevents consumers using advice In there Research how did they ask the questions
    Most other research reported seems to Indicates that the cost of advice has been one of the main barrier
    With Mr Bailey using words like “vulnerable ” in his speech in the Mansion house last night
    What will the compensation levy be in the years ahead?
    Can you imagine the adverts from Claim firms
    Do you feel vulnerable when comes to investing If so we can get all your money back.

  9. Is there any evidence to support any of these claims? If so where can I read it?

    The FSCS remains based on the basis that it is not the polluter who pays and of course it is not the CEO of FSCS who pays either.

    If he did have to contribute he might be minded to find a more robust solution.

    Product levy anyone?

  10. I think it’s extremely naive to believe that this will benefit advisers in way at all.

    Does anyone believe that people are geniunely so aware of the FSCS limits that they are really put off using an adviser because the limit is £50,000?

    For the vast majority of the public, a £50,000 limit would be more than sufficient.

    For those with more than £50,000 in non-pension assets, in order to benefit from a higher FSCS limit they would have to have received poor advice (and that advice that was worse that the client’s own DIY approach), lost more than £50,000 and the adviser would have to have ceased trading before the problem was known. Consequently the number of people benefiting from this increase is going to be very small.

    If clients are aware of the FCSC limits so much that they would really avoid seeking advice, surely they’d instead use that knowledge to find advisers with good financial strength so that the FCSC limits was unlikely to ever be a factor.

    I’d like to see the research questions as I suspect that this might have used leading questions along the lines of:

    ‘If there was a higher compensation limit would this encourage you to take advice?’

  11. I suppose that he also writes blank personal cheques.

  12. “…….He says: “We know that one of the things that deters people seeking advice is how much they claim back on the advice if the advice turns out to be bad. Our research shows that very clearly.”? Really? You didn’t survey any of my clients thats for sure. In almost 30 years in this business I have never had anyone say to me me “No Marty i am not taking your advice because i am only able to get £50K back if you miss sell this to me.
    Can I put a question out there to every blogger or reader “Would you really want to take a client on whose sole purpose of coming to you is to get uncapped compensation?” I would tell them to bu**er off and do it elsewhere. Our levies are steep enough as it is without adding this to them and believe you me they will start mounting as time goes on.
    “…..However, if an advice firm enters administration, the lifeboat fund can only pay out a maximum of £50,000 to anyone mis-sold investments.” Exactly Mr Neale it is a lifeboat fund its not a luxury cruise liner.
    Why are you not on blessing about removing the limit of deposit savings from its current £75K to unlimited and while you are at it try removing the ridiculous caveat that this applies per institution, not per bank. So for instance A & L customer who has £75K on deposit and also has the same with Santander, they are only protected to £75k as they are the same institution.
    He is a lunatic

  13. Nicholas Pleasure 27th October 2016 at 2:46 pm

    “We know that one of the things that deters people seeking advice is how much they claim back on the advice if the advice turns out to be bad. Our research shows that very clearly. The FSCS in that respect is part of the solution.”

    Can you ask him for a copy of that research please, including the scope of it and the questions asked. I’d also like to know how much it cost us.

    In 16 years of being an IFA not one client has ever asked me about the FSCS protection that applies to my advice. Maybe I’m unusual and naturally look very trustworthy?

  14. I feel this is fair and just especially for missold SIPPS. Many totally naive people have been scammed by so called IFAs who have talked these poor people into investing every penny into very dubious schemes. (Look at Store First). They do not know they about FSCS limits and whether they are covered,many have invested more than the £50K limit. Surely if we were in some our ignorant parents place we would want the whole investment amount paid back not just a portion?

  15. Neil F Liversidge 27th October 2016 at 4:38 pm

    @Karen Clements: The SIPP problem is centred on securities fraud. It happens because the regulator is incompetent and the police are lazy. I’ve been investigating it myself for over a year but there’s still no sign the FCA is doing anything; on the contrary it reauthorised a major perpetrator. Karen, if your local police commissioner said to you and all the folks in your street,”You’ve all got to club together to compensate Mrs Smith at number 43 whose house and dank accounts were emptied by burglars but we’re not going to try to catch or prosecute them,so it’ll go on happening and we’ll keep coming back to you for more money”, what would you think? Would you be happy to keep shelling out? Or would you maybe try to get the idiot sacked and install somebody willing to actually do the job properly? That is what we are up against but the FCA and police pretend otherwise because they are lazy and incompetent.

  16. This man has far too much time on his hands, unaccountable for his actions. His tome would be in the fiction section of the library, hardly a piece to be found in the reference section.

  17. Blue Eyed Monster 27th October 2016 at 5:31 pm

    In theory it is right that anyone who loses money through mis-selling should get all their loss back. Same with bank accounts. Why have a limit of £75k? The problem is with funding. That needs to be addressed, so that my firm is only contributing to the missales caused by similar sized and funded IFA firms that are properly authorised and financed.

  18. Nick Bamford ~ The purpose of the FSCS is to compensate investors for losses incurred as a result of bad advice (in cases where the adviser firm itself is unable or no longer available to pay). A product levy could not provide a satisfactory substitute for this because what may be okay for one type of investor might be totally unsuitable for another. Also, the size of such levies would need to vary according to the perceived risk of each particular product and allocating different products to different risk/levy bands would be a devil of a task ~ who, for a start, would do the risk rating and levy banding process? The FCA? I hardly think so. What do they know about risk rating products? The FCA will authorise just about anything provided the application paperwork has been correctly completed but they’re always very keen to emphasise that authorisation should not be conflated with approval.

    Some product providers might well cry foul at being allocated to the 5/5 risk/levy bracket when, in their opinion, their product should be in no higher bracket than 3/5.

    Even if it were possible, the first outcome would be to kill off consumer appetite for any product in the highest levy band ~ consumers would naturally ask of the person recommending one: Why? A reasonable answer might be: Because higher risk products, although offering potentially higher rewards also pose a higher risk of failure. As the consequences of such failures may well ultimately fall on the FSCS (should my firm go bust), investors in them must pay a higher levy. It’s not a very confidence-inspiring scenario, is it?

  19. We need to see this, so called, ‘research’

  20. James Clancy – Harry Katz – in fact most contributors in this article – sounds like the rants of grumpy old men. But, hang on. I’m one too. And they’re right. Enough said!!

  21. What Drivvell yet again !!

    New customers don’t seek advice now due to the pure cost of doing so which is duly made worse caused by the excess level of regulation and levies that continue to increase seeming without limit. Increasing the levels of compensation will result in yet higher fees and more charges passed on to customers which will then loose even more pushing costs up further etc etc – unfortunately this is a viscous circle that can only be stopped by limiting claims not making it even more attractive – someone needs to get real and realise that all this is doing is denying more ordinary people access to advice and forcing more businesses to close due to ever decreasing profits and rising costs which benefits no-one !

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