The Financial Conduct Authority (FCA) will begin a review of its rules on the scope and coverage of Financial Services Compensation Scheme (FSCS) payouts for “specific regulated activities”.
In its 2021/22 business plan, FCA chief executive Nikhil Rathi said that he wants the UK regulator “to be more innovative, assertive and adaptive”.
During the FSCS review, the watchdog will assess whether its compensation policy framework “is appropriate, proportionate and takes into account changes in the market and our regulatory approach”.
In the long-term, the FCA wants firms that fail “to do so in an orderly manner” and it intends to be “better aware of those firms most likely to fail so that we can reduce the harm from their failure”.
To support this, the regulator wants “firms to have appropriate capital, liquidity and reserves to cover outstanding redress liabilities”. It believes that this approach will overall “reduce the level of FSCS payouts”.
The FCA said: “We want the scale of compensation liabilities to stabilise in the medium-term and reduce longer-term as firms hold more capital and liquidity, and fewer cause misconduct that requires them to pay redress on a large scale.”
This statement comes at a time when financial advisers are suffering from rising compliance costs due to ever-increasing levies and regulatory fees.
Consumer priorities
In the 2021/22 business plan, the FCA also outlined several other areas it will look to improve to help consumers across the financial services sector.
These include:
- Strengthening rules on financial promotions to protect consumers in relation to investments;
- Continuing to improve standards of pension advice;
- A consumer campaign on scams and high-risk investments; and,
- Progressing proposals for a consumer duty to raise standards in firms’ treatment of consumers.
In a bid to bolster its campaign on high-risk investments to help consumers make better decisions about their investments, it will create a ‘consumer investment coordination group’ with the FSCS, the Financial Ombudsman Service (FOS) and the Money and Pension Service (Maps).
With this action, the FCA wants to see the following outcomes achieved:
- More consumers who want to save long-term consider investment opportunities;
- Fewer consumers who have a higher appetite for risk holding over £10,000 ($13,840, €11,685) in cash;
- Fewer consumers lose money because they are straying into investments that are riskier than they would prefer;
- Fewer consumers with a preference for low-risk investments, or who have one or more characteristics of vulnerability, investing in high-risk investments;
- Fewer consumers lose money to investment scams;
- Less consumer harm from unsuitable advice and a higher portion of redress paid by the firms that cause this harm; and,
- Prevent harm, which will reduce the burden on levy payers.
Industry support
Tim Fassam, director of government relations and policy at Pimfa, said: “We welcome the FCA announcement this morning in its business plan that it intends to identify and prevent harm arising in the market faster and more effectively.
“Pimfa has regularly raised concerns about the FCA’s standard of supervision in the past which, we consider, has contributed to firms failing, consumer detriment and ever rising and unsustainable FSCS bills for the vast majority of well-run firms in the market.
“We set out a number of recommendations in our recent paper on FSCS levy reform and it is encouraging that these have been largely adopted in the FCA’s plans to improve its processes and oversight of firms published today.
“However, we are clear that this cannot simply involve the provision of new rules and a further expansion of the handbook. The FCA needs to use the tools already available to them better. To this end, we look forward to the fruits of its data strategy work being implemented to ensure firms are providing data with a purpose rather than just because it is an obligation.
“We will continue to work closely with the regulator to ensure that we can all work towards a retail investment market which consumers derive confidence from, and our member firms can thrive in.”
Engagement
FCA top boss Rathi said in the business plan: “The FCA must continue to become a forward-looking, proactive regulator. One that is tough, assertive, confident, decisive, agile. One that acts, acts fast – and where we can’t act, engages enthusiastically with those who can.
“To get there involves making progress on three fronts. First, continuing to be more innovative – taking advantage of data and technology to increase our ability to act decisively. Second, continuing to be more assertive – testing the limits of our powers and supporting others to bring their powers to bear.
“Third, continuing to be more adaptive – constantly learning and always adjusting our approach as consumer choices, markets, services and products evolve. And underpinning it all will be a regime of accountability and culture of transparency.
“Over the next 18 months you will continue to see an FCA that looks and feels even more different. One that operates differently, partners differently, and communicates differently.
“One that delivers market integrity and delivers for the consumers that we serve. One that is not only purposeful but that is fit for purpose. There is a lot of work to do. And I am confident that we have the right strategy, the right people and the right ambition to do it.”
