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Inaccuracies over FSCS powers

The letter in Money Marketing, headlined, Keep your nerve over claims, was an inaccurate account of the Financial Services Compensation Scheme’s powers and practices.

The letter wrongly accuses the FSCS of hound-ing retired IFAs over old business based on “hindsight reviews”.

The FSCS operates under FSA rules (known as the Comp rules). These rules require us only to pay compensation where a firm is in default. A firm is declared in default if it is unable or likely to be unable to meet protected claims made against it.

Once the FSCS has received a claim for compensation against an authorised firm, we carry out an investigation into the firm in question to determine whether it should be declared in default under the FSCS’s rules.

The author of the letter incorrectly states that the FSCS has no powers to initiate legal action.

As part of our investigations into the solvency of the relevant firm and/ or the principals behind it, the FSCS has the power, under section 219 of the Financial Services and Markets Act 2000, to request specified information or documentation from the firm and/or its principals for the fair determination of claims.

If the relevant party fails to comply with such a request, the FSCS can make an application to the High Court under section 221 of the FSMA.

Unless the firm and/or its principals has a reasonable excuse for non-compliance with the FSCS’s request, it may be held to be in contempt of court, which is punishable by a fine and/or imprisonment.

Once the FSCS has declared a firm in default, we can start processing claims made against the firm. Prior to making a payment of compensation, the FSCS usually requires that a claimant assigns his or her legal rights to the FSCS in their entirety. This enables the FSCS to “stand in the investor’s shoes” and pursue a recovery against the firm and/or its former principal(s) (if it is a partnership or sole trader).

The FSCS can, and does, initiate legal proceedings against former principals of firms where it considers it to be both reasonably possible and cost-effective. Indeed, the FSCS is under a duty to do so under the scheme’s rules.

Our approach is to use our powers proportionately to establish firms in default and pay compensation claims where appropriate, reducing costs for levy payers by making recoveries where practicable.

Your readers would do well to ignore the advice in the letter previously printed.

Loretta Minghella
Chief executive
The FSCS
London E1

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