Savers have been undercompensated by as much as £1bn ($1.2bn, €1.1bn) over the last six years because of the limit on how much the Financial Services Compensation Scheme (FSCS) can pay.
Almost half (£472m) of the total that investors missed out on related to pension advice claims.
As a result, the lifeboat scheme is calling for the current £85,000 threshold to be increased to further protect consumers from harm.
The lifeboat scheme lamented that the Financial Ombudsman Service (FOS) has been granted the ability to award up to £375,000 from 1 April 2022, and that its limits are automatically adjusted each year in line with inflation.
The same cannot be said for the FSCS’ threshold which has remained the same, but the UK lifeboat scheme believes “there is a strong case” for a similar mechanism to be introduced.
The FSCS said: “For pensions advice claims, including pension transfers, the rise in uncompensated loss has been far steeper, and the average uncompensated loss per customer far greater than the average across all claim types.
“The total number of claims where the customer’s loss was over the relevant limit was almost 3,600 in the 2021/22 financial year that has just ended. This number has risen steadily over the past six years, and in that period has resulted in just short of £1bn in loss not being paid back to customers as compensation.”
Simon Wilson, head of resolution at the FSCS, added: “When we declare an IFA in default, we see claims where customers have lost hundreds of thousands of pounds, life changing sums of money that we simply can’t return due to the limits in place.”
‘Delicate balancing act’
Tom Selby, head of retirement policy at AJ Bell, said: “The FSCS provides hugely valuable protection for savers and investors in the event the firm they have trusted with their cash goes to the wall.
“This compensation scheme is not only vital in helping those who face financial disaster – it also gives people confidence their hard-earned savings will be safe even if the worst were to happen.
“That over £1bn of losses have gone uncompensated due to the £85,000 cap in the past six years sounds shocking on the face of it, with roughly half of those uncompensated losses linked to pensions advice. Given the scale of uncompensated losses, the FSCS understandably wants to see the pensions compensation cap increased above £85,000.
“However, the FSCS faces a delicate balancing act as the funds used to pay compensation come directly from financial services firms via an annual levy. In 2022/23 that levy is expected to be £625m, and any increase in the pensions compensation cap would inevitably increase the pressure on the overall levy.
“If the compensation limit for pensions were to be increased, this should be as part of a broader review of how the FSCS is funded.
“As things stand, good firms doing the right thing by their customers are forced to fork out for huge FSCS levy bills in order to compensate the wrongdoing of a few bad apples. Where firms are found guilty of wrongdoing and are fined by the FCA, this money goes straight to the Treasury.
“There is a strong argument for using money from FCA fines to pay compensation to customers. This would be a genuine ‘polluter pays’ model that could be used to both boost compensation to customers and lower FSCS costs to the rest of the industry.”
