FCA Consultation CP16/42 Reviews Funding Of The Financial Services Compensation Scheme

The Financial Conduct Authority (FCA) has issued a further consultation paper on reviewing the funding of the Financial Services Compensation Scheme (FSCS).

The FSCS provides important protection for consumers paying compensation when authorised firms have gone out of business and consumers have suffered harm. The on-going review seeks to ensure the scheme continues to provide the right protections, works effectively and is funded fairly.

The main areas which are addressed in the paper include:

• options for reducing harm to consumers by giving firms incentives not to carry out activities for which they have no professional indemnity insurance (PII) cover, and also to reduce the burden on the FSCS through alternatives to capital and PII (for discussion)
• options for redistributing the bill and smoothing costs to address the perceived unpredictability and volatility of FSCS levies (for consultation)
• increasing compensation limits to reflect changes to the options available to consumers when they retire (for consultation)
Under the proposed reforms advisers could be set to save significant amounts of money on their regulatory bills. The regulator wants providers to pay 25% of the lifeboat fund’s compensation costs, has also proposed merging life and pensions and investment funding classes together and moving pure protection from life and pensions to the general insurance funding class.

The regulator is also consulting on increasing the FSCS compensation limit for investment provision to £85,000 and changing the limit for claims in relation to intermediation of long-term care insurance which is a pure protection contract in line with the limit for other kinds of pure protection claims, at 100% of the claim, instead of £50,000.

The FCA is also finalising rules that were consulted on previously to change the scope and operation of the FSCS:

• introducing and extending consumer protection
• requiring Lloyd’s of London to contribute to the retail pool
• additional reporting requirements
• amending payment arrangements

The main aim of the consultation is to ensure that the FSCS provides an effective and sustainable compensation scheme for consumers who have suffered harm and the review to date has focussed on the following principles and outcomes:

• ensuring that the FSCS is a backstop rather than the first line of defence when firms fail
• reducing levy volatility in line with the conclusions of the Financial Advice Market Review
• reflecting conduct risk where appropriate, in particular unsuitable advice on high-risk investments
• implementing a robust funding model that does not require constant reassessment
• creating sustainable classes that provide sufficient funding for compensation
• ensuring that the model is economical and practical to implement
• meeting consumers’ reasonable expectations for protection when things go wrong

The consultation period will run until 30 January 2018 with the FCA saying it will consider feedback and publish final rules in a Policy Statement next year.