The Financial Conduct Authority (FCA) is planning to assess the impact of increasing compensation limits for pension claims.
This comes after a call for input on the framework for protection provided through the Financial Services Compensation Scheme (FSCS), following concerns about increasing costs.
The FSCS provides compensation when certain authorised financial services firms are unable to meet claims against them. The current limit is £85,000 ($105,340, €98,784) for most types of claims covered by the FCA’s rules.
The call for input 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.
The review aims to make sure the compensation framework continues to provide an appropriate level of consumer protection, with costs to industry distributed in a fair and sustainable way supporting innovation and growth.
The main theme from the industry 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 its review, the FCA is planning to:
- Asses compensation limits to consider whether they remain at an appropriate level for different types of claims;
- Review funding class thresholds to consider whether they remain at an appropriate level; and
- 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.
In regard to pension claims in particular, the FCA said: “While we consider that the current compensation limits are set at a reasonable level for most types of claim, we believe that it is appropriate to consider further the protection available for claims about pensions.
“We therefore plan 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.”
‘Assertive action’
Sheldon Mills, executive director of consumers and competition at the FCA, added: “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.”
Caroline Rainbird, FSCS chief executive, said: “I was encouraged to see the level of response that the FCA received to the discussion paper, reflecting the strong feelings amongst industry and consumer groups alike about FSCS and its work.
“It is clear from the feedback that FSCS continues to be seen as an essential safety net, and that removing protection from consumers is not something there is much appetite for. Instead, there is consensus that we must focus on improving conduct in the market and this must be the primary goal.
“A review of the compensation limit for pensions claims is something we called for, and I am pleased that this will be looked at next year. We also welcome the review in-tandem of the levy limits for each funding class, and the suggestion to introduce periodic reviews for both compensation and class limits.”
Polluter pays model
Simon Harrington, head of public affairs at trade body Pimfa, added: “It is helpful that the FCA has set out its thinking and the potential future direction of the compensation framework. We remain committed to seeing a reduced FSCS levy over a sustained period of time, largely because this would indicate fewer consumers having received a poor outcome that it would have been better to avoid in the first instance.
“We continue to believe the way to reduce the funding requirement for the scheme in the long term is through better, more targeted regulatory action which drives bad actors out of the market well before consumers have suffered harm. The FCA should be congratulated on what we perceive to be significant and welcome steps to address this as part of its consumer investment strategy and wider transformation project.
“However, the FSCS is constructed to pay for the sins of the past rather than those of the present, and any progress made on the regulatory front will not be apparent for some time. We remain of the view that a polluter pays model remains the fairest way to compensate individuals and, in line with this principle would again urge the Government to consider the use of FCA fines to help contribute to the FSCS levy.
“In the preceding month alone, nearly 25% of fines issued by the FCA could have been redirected towards consumers instead of the exchequer – this is a sizeable amount and would have a significant impact on the overheads of UK business.”
