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Keith Richards: Is the FSCS fit for purpose?


As the debate on how to fund the Financial Services Compensation Scheme rumbles on, with little sign of a consensus, the real issue we should be addressing is not how the compensation scheme is funded, but if it is actually fit for purpose?

I believe that to be a very legitimate question, given the FSCS has built up a significant legacy of liability over the years, much of which relates to people or firms who have long disappeared.

Providing pooled protection for consumers against firms that are unable to meet their responsibilities is difficult to argue against. In reality however, a growing number of potential claims are being met by a reduced collective of contributors, driving some away from regulated activity and deterring new entrants to the market.

Ironically, the cost of the FSCS has been a contributory factor in reducing the availability of regulated advice. Consumer protection is correspondingly lessened, leaving many to fend for themselves and run the risk of falling victim to scammers.

Although the current funding review is welcomed, the parameters are too narrow. Much wider consideration must be given if we are to find a viable solution for the future.

With that in mind, we have re-engaged the Government to press the case for broadening the review beyond that of funding alone.

Professional advisers have no objection to making a funding contribution – ultimately the FSCS is there to protect their own clients and provide additional confidence in the sector. But contributions to the scheme should be fair and apportioned in relation to the root causes.

And this is the perfect time to do it. Whilst examining the FSCS levy with a view to making it fairer for advisers, the FCA also needs to ensure it is sustainable for the public.

If the opportunity is missed, the consequences of under-protecting and under-serving those members of the public who need regulated advice will not be favourable.

Keith Richards is chief executive of the Personal Finance Society


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There are 8 comments at the moment, we would love to hear your opinion too.

  1. Very welcomed ! Coupled with a minimum standard Professional indemnity insurance policy this never ending issue could be resolved !

  2. I think in all this we should not lose sight of the fact that the FSCS serves a valuable purpose. It allows for a cost effective resolution of disputes between clients and firms without recourse to legal action. We have a sad case where a client lost a significant 5 figure sum as a result of a pension administrator error / mistake. The only action the client can take is a civil action which not surprisingly our client is unwilling to pursue.
    So the FSCS should be seen as an effective solution to a real problem and I agree that its funding cost should not become another torpedo into the ship that is regulated advice.

  3. I don’t think there will be much argument with Kieth on this one,

    But he also needs to consider the problem is 2 fold both the FSCS and PI is unfit for purpose. and why do we pay for both ?

    PI is getting ever more complicated, micro managed and micro underwritten which makes it very worrying as to if, what or even, you are covered at all, PI is also very sensitive to FCA policy and enforcement by way of a good excuse to hike premiums making it expensive !

    I have said many times before I believe the FSCS is very important and one I am very happy to fund (my share), however it is woefully un-fair and serves to punish the good and their clients.

    The need now is to scrap the requirement for PI and fund the FSCS !
    Yes this may well be more expensive in the short term but reap the rewards later, companies and individuals then will be confident in the cover they have, no exclusions, no excess’es, no trying to wriggle out of claims (if upheld) seamless communication with FOS, Adviser, FCA and FSCS

    We all fill in our RMAR so one would think its a very easy exercise to base premiums on, turnover, complaints and type of product and business risk.

    I think this will also combat the capital add, problem as it would not be needed !

    We are in effect insured twice, and in my (like many others) case made to sit on valuable capital….. just because or in case !

    • Agree with everything you say. Why pay PI when if fact it probably is of no use what soever when talking about the FSCS. I am a tad confused about one thing you say which is why it will be more expensive initially (or in the short term). Is it not the FSCS only come into play when a firm has gone boots up? that being the case PII doesn’t come into the equation as the FSCS “picks up the tab” (does it not)? that being the case if we scrap the requirement for PI and have everything covered by the FSCS surely the “extra funding” we would be required to pay for the FSCS would be less than the PII premiums from the get-go. Am I looking at this too simply or have I totally missed something glaringly obvious?

      • Hi Marty
        The idea of completely removing PI and a move to funding FSCS in isolation would mean the FSCS would pay out on any upheld FOS complaint as well as firms going “boots up” as you put it, or for scams.

        Now we know the FSCS is run on a system of money in money out and insurance companies already have a fighting fund (if you will) this would mean the industry would have to initially build up a sizeable fund within the FSCS then you start to move into a claims ratio more claims higher premiums lower claims lower premiums ! also if….. and this a massive if, correlation between FCA, FOS, Industry, and FSCS should seemless ! lets face it the FCA/FSCS hold all the info needed by way of the RMAR to set premiums based on turnover, complaints and exposure to business and product risk !

        So the only reason (i think) premiums would potentially be higher initially would be to build up funds to meet existing claim’s and putting some in the pot for future claims

        The question is (i think we know the answer) do PI insurers collect more in premiums than they pay out (per year) in “successful” claim’s ?
        My thought process is…….. why cant the FSCS operate like a PI insurer and be profitable like a PI insurer, we get cover that is cast iron guaranteed, no stupid complicated form filling as its all based on what we already provide to the FCA anyway.

        Do any of us really know what we are and what we are not covered for (i must speak to my PI underwriters 3/4 times a year to clarify points)

        And its fair because a lot of it will be risk/ complaint based, the more higher risk you business or more complaints the higher the premiums

        We also know the FCA do have grave concerns about PI and its real effectiveness !

  4. Why aren’t they talking about the FCA’s hand in all this? Why isn’t the FAMR looking to address:-

    1. restoration of the longstop (unknown liabilities from the indefinite past are one of the biggest burdens on mature firms, not least networks and their members),

    2. a complete redesign of the RMA Returns system so that the FCA can identify and prioritise its attention towards firms selling the types of high risk (usually unregulated) products which appear to be the prime cause of the FSCS’s skyrocketing levies and

    3. A system of special permissions for any firm wishing to sell UCIS, not least proof of adequate PII cover? Special permissions are required for advising on transfers out of DB pension schemes so why not UCIS?

    The idea of reforming the way the FSCS is funded so that firms pay less to cover the liabilities of those which have gone out of business is all very well, but by what alternative means will those liabilities be covered?

    Also, the idea of making providers contribute towards the FSCS (which is there to compensate consumers for the consequences of bad advice) is fundamentally unjust. Providers (in the main) don’t give advice, so why should they be required to fund the FSCS? Bad advice is nothing to do with them.

    The biggest contributor to the growing crisis of the FSCS is the FSA/FCA. But will they admit it? Not a snowball’s chance in hell.

  5. Why is nobody trying to persuade the Treasury to stop grabbing all the FCA’s fines so that these can instead be channelled into the FSCS?

  6. Financial services fines have fallen to their lowest annual level since 2007, the FCA has imposed a total of 23 fines worth £22.2m, down from 40 in 2015 worth £905m. Not much left for the Treasury or the FSCS.

    Also, as I understand it, the FSCS recognises the long-stop when it comes to considering claims, how weird is that?

    PI only supports the ‘living’, the dead can go to……..the FSCS and that needs addresssig.

    Perhaps PI needs a massive rethink with long term cover to 15 years ‘beyond the grave’?

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