"Given this, we think there is merit in looking specifically at whether the increase in the proportion of pension claims that involve losses in excess of the FSCS’s compensation limit seen in 2021 was a short term ‘blip’ or points to a longer-term trend, and whether higher limits for pension claims might be appropriate."
The FCA said it plans to commence a review of the current compensation limits in 2023, particularly to consider whether it would be appropriate to increase compensation limits for certain pension claims.
“As any increase in compensation limits would increase potential claims costs falling to FSCS levy payers, we will carry out the review of compensation limits alongside work to review the current funding classes,” it said.
Compensation framework review
The FCA’s review was launched following concerns about the increasing cost of compensation liabilities falling to the FSCS, which could create a barrier to firms entering or wishing to stay in the market, potentially affecting the availability of some financial services.
In the discussion paper last year, the FCA said high-net-worth or sophisticated investors could be barred from claiming compensation through the regulatory channels, that investment advice could be excluded from FSCS protection and that firms could be required to pay a premium on levies for carrying out higher risk activities or selling risky products.
The main theme from the feedback was the importance of firms improving their conduct so there were fewer calls on the FSCS from mis-sold products by failed firms.
Feedback also focused on the need for firms to be more financially resilient to address the underlying causes of high redress liabilities.
For the next phase of the review, the FCA is planning to:
- review compensation limits to consider whether they remain at an appropriate level for different types of claims
- review funding class thresholds to consider whether the class thresholds remain at an appropriate level
- carry out consumer and firm research, in conjunction with the FSCS, to improve the FCA’s understanding of the impact of FSCS protection on consumer decision making, confidence and behaviour, and on firm behaviour and incentives
Sheldon Mills, executive director of consumers and competition at the FCA, said: “We welcome the constructive engagement and feedback which will inform the next phase of this work.
“We want to make sure the cost to industry for providing vital protection to consumers through the FSCS is distributed in a fair and sustainable way – that the polluter pays.
“We’re continuing our assertive action to prevent harm from happening in the first place, which should help reduce the levy over time.”
The FCA said it is already taking action to tackle the root causes of high redress liabilities and crack down on problem firms as part of its consumer investments strategy.
This includes: being tough at the gateway, placing twice as many restrictions on firms to prevent them from promoting or selling certain products and services, and using emergency powers to prevent firms, who advised BSPS members, from disposing of assets to avoid paying compensation.
sonia.rach@ft.com
