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Neil Liversidge: Should the FSCS continue to exist?

Neil Liversidge

I am sorry but I really cannot get animated about who funds the Financial Services Compensation Scheme. The question has moved too far from first principles, being about who gets treated most or least unfairly, rather than one challenging its fundamental unjustness.

Many years ago in my other lobbying life working on behalf of motorcyclists, a UK transport minister indulged in a moment of extraordinary candour. I was pressing him on the unending flow of anti-bike legislation. He explained he was not personally a safety freak and felt adult bikers had the right to make their own choices.

However, MPs got endless letters and surgery visits from concerned parents. Anti-bike legislation was about ensuring politicians a quiet life in that one regard at least. We must stop deluding ourselves: the FSCS exists for that very same reason.

Imagine for a moment FSCS boss Mark Neale was compulsorily entered into a mutual insurance scheme with his neighbours. Those who left their homes unlocked and suffered burglaries would be paid out just like their more responsible and careful neighbours. The risk to the honest and prudent, of which Neale is surely one, would be obvious.

Some might have their dodgy mates build them an extension on the cheap. It fell down? Never mind, the others pay. Friends might be invited over to suffer lucrative “accidents”, with the compensation shared. If the scheme’s assets looked like falling short, no problem: just bill the members for a top-up premium.

The fund would, of course, be administered by a highly paid civil servant with a final salary pension. A controller over whose appointment the members would have absolutely no influence. To ensure his continued popularity with the “right” people and subsequent progress through quango-world, he might even call for the claim limits to be increased. How keen would Neale be to be shotgunned into such an arrangement? I think we all know the answer.

The limits of exposure

His suggestion of removing the £50,000 cap on investment product compensation claims thoroughly dispels any idea he is just doing his job. His justification, that unlimited compensation will help advisers equally dispels any idea that he understands the economics of the advice business or the less honest side of human nature.

If carried into effect, his proposal would demolish the last flimsy defence against the moral hazard for which the FSCS by its very existence is responsible.

I did not get into financial services to make the poor poorer. But when the FSCS can be gamed with the active complicity of its own boss to make any “investment”, however ridiculous or hazardous, a no-lose bet, it is time to question not who funds the FSCS and in what proportion but whether it should continue to exist in any form.

We must cease to accept the injustice that springs from political cowardice.

Neil Liversidge is managing director of West Riding Personal Financial Solutions



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There are 13 comments at the moment, we would love to hear your opinion too.

  1. Imagine for a moment that you had £50000 in HBOS a few years ago and Lloyds didn’t rescue it. No FSCS no £50000. Is that the outcome you are looking for?

  2. I’ve not been in the financial industry for very long and I would still be considered a trainee. But wasn’t the FSCS designed to shield investors/pensioners from fraud/incompetence/negligence? Your analogy in my opinion and correct me if I am wrong, is not suitable. Many investors are considered uninformed and sometime’s people’s live savings are at stake. If an individual losses his capital no matter how diligent and careful by getting scammed or his advisers did a poor job because XYZ then why should he not be protected by the FSCS? It’s a massive costs but it has its benefits.

    • I totally agree with you Damian. I personally have lost 67K through no fault of my own. A massive scam. I’m waiting now for my 50K back from the FSCS. If it was not around I would get nothing. I’m very glad it is in operation. At least 50K is better than nothing!

  3. Let there be no mistake, the FSCS is a cat transformed into a tiger. Its initial premise may have been laudable, that the industry funds compensation where the guilty adviser no longer trades, but it has devolved into a convenient means of placating the consumer and deflecting any accusations that the Treasury/Government might receive.

    Fairness doe snot come into it. We have to live by the TCF mantra or suffer yet those responsible for the design and implementation of the FSCS and the FOS sit back, satisfied, that they have successfully demonstrated consumer protection capability regardless of the tenet of justice that resultantly is lost.

  4. Nicely summarised Neil.
    Looking at the the numbers employed by each of the FCA, FOS and FSCS gives a clear enough indication of just how broken the system is. The fact that, between all of them, so little is achieved to protect the public or to maintain confidence is incomprehensible. The fat cats (the regulator) should be ashamed.
    I agree with you that “we must cease to accept this injustice” and I hope that a petition will get the ball rolling. Now is as good a time as any.

  5. I cannot but agree with Neil Liversidge, and the frequent contributions from IFAs in this and other online journals, that there is much wrong with the FOS and the FSCS and much that could be improved.

    But likening a claim to FSCS against a defunct IFA, or other authorised firm, to a burglary claim against a mutual insurance fund by an imprudent home owner who leaves his property unlocked or a scam accident claim is entirely inappropriate.

    In the case of the scam accident claim, there is a policy validly entered into but in respect of which the claimant has either wholly fabricated the fact of an accident or has deliberately engineered an accident to occur in order to make the claim. The active wrongdoer, both in criminal terms and in civil terms, is the claimant and no-one else.

    In the case of the careless homeowner, there is also a valid policy but the active negligence in not taking basic precautions is that of the homeowner alone.

    In a complaint to the FOS and a claim to the FSCS, the primary active wrongdoing or the primary active negligence does not arise from the claimant but from the advice of IFA or actions of other authorised firm.

    In a limited number of cases there may be contributory negligence on the part of the complainant or claimant in not paying attention to the original advice, or there may be contributory wrongdoing by the complainant or claimant in the course of the complaint or claim by deliberately exercising a selective memory as to what he was told.

    But for all the faults of the FOS and the FSCS, and I am no apologist for either, I genuinely do not believe that the wool is easily pulled over either of their eyes.

    To abolish the FSCS, however, would leave the body of investors with no means to access justice in the event of the advising IFA going bust, which often happens deliberately to avoid liabilities.

    Rather than abolish it, the premiums to the FSCS, i.e. the firm’s annual levy, should be risk weighted just as happens with the premiums of the mutual insurance Mr Liversidge favours.

  6. Imagine you have a unregulated adviser advise a property Sipp invested in Cape Verdi and it makes a fortune great you win, then imagine same Sipp goes bump and you claim off FSCS you don’t lose!
    Either way you are on a winner, it is all wrong.

  7. Fairer funding remains the key issue, the risk based levy sounds very appealing, as does more provider participation, especially from investment management houses. All sensible options, and fairer, included within the FCA consultation. But, as a specialist Claims Management Company, we would also argue that the assets of a failed advice firm should contribute to the FSCS pot. It cannot be right that a firm is liquidated, and then the key asset – the client bank – can be sold for a token sum to perhaps someone connected to the original advice firm. Much more sensible that the liquidator should seek to sell that client bank on the open market, to maximise that, and other assets, and then contribute a percentage to FSCS. Having met many clients who’s lives have been ruined by poor advice, especially where the investments didn’t match their stated attitude to risk, it’s hard to imagine a world for unsophisticated consumers without some sort of protection. But currently placing the lions share of funding on we’ll run, compliant advice firms is clearly unfair.

  8. Neil F Liversidge 13th January 2017 at 12:36 pm

    The real problem is that whilst some so-called ‘investments’ might be unregulated, when sold by a regulated firm the FSCS is then able to game the system so as to find excuses to pay out. By so doing it poses as a consumer champion thus guaranteeing its political support. Politicians always like it when they can avoid criticism by buying off troublesome noisemakers with somebody else’s money, but it’s our money they’re spending.

    The real answer to the FSCS problem is very simple. Firstly unregulated should MEAN unregulated. No halfway houses. If a product is unregulated there should be no comeback via the FCA, FOS or FSCS. Those who lose out should be forced to seek redress via the courts. Add a provision that makes it a criminal offence to pass off an unregulated investment as regulated and we might start to get somewhere. This would be simple enough for the general public to understand. It would even be simple enough for the politicians to understand.

    • ‘Game the system’???? If a regulated adviser in a position of trust makes a recommendation to you that results in your savings/pension disappearing to fraudsters, knowing full well the investment is unregulated and designed to net them a high commission, the FSCS will protect you.

      That’s not ‘gaming the system’ that’s protecting and upholding the reputation of financial advice.

      Lets imagine there was no FSCS, the millions paid out to investors over the years never happened, only thousands of headlines about crooked financial advisers – You think this industry would still exist?

      Your attitude is disgraceful.

  9. The FSCS is a good thing and one I do support, but I do agree with you Neil in its current guise is broken as bad as it can be.

    Equitable funding, ditch PI and its requirement and correlation and symmetry across the FCA, FOS & FSCS IMHO would be a long term fix.

  10. The problem is the FSCS is now virtually the first port of call. The only way to change that is to change the rules under which PI operates. Be under no illusion there will be no net saving to advisers under the restructuring of the funding of the FSCS. The mantra of the FCA is to try to make funding of the FSCS fairer. It will do this, I fear, at the reduction of PII providers or mandating the wording of policies. It does not take a rocket scientist to work out what will happen to PII premiums. However, the funding of the FSCS will be fairer (and possibly lower) but that will come at great increase in PII costs. The FCA will not care one iota about that as their role is not to make PII and FSCS cheaper, but only to spread out the cost of the FSCS more evenly which I am sure they will do……….. Admirably

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