FCA to discuss improvements to compensation framework

The FCA is discussing new plans to improve the the financial services compensation framework.

A new discussion paper has been published by the regulator, which added that it is aiming to maintain a compensation framework that is funded in a “fair and sustainable” way.

The Financial Services Compensation Scheme (FSCS) provides compensation when certain authorised financial services firms are unable to meet claims against them. According to the FCA, it plays a “critical backstop role” in protecting consumers and ensuring confidence in financial services markets.

The FSCS’ operating costs and compensation payments are funded by levies on financial services firms.

Over the last decade, the overall FSCS levy has increased from £277m in 2011/12 to £717m for 2021/22, as recently reported by the FSCS. Many of the claims driving these costs relate to historic misconduct by firms in the investment sector, including financial advisers and self-invested personal pension (SIPP) operators, which have subsequently failed.

This pipeline of historic claims is expected to result in further FSCS payouts over the coming years, the FCA revealed.

FCA executive director for consumers and competition, Sheldon Mills, commented: “We want consumers to have trust in a thriving UK financial services sector, and businesses to be confident that they can bring new and innovative products to market.

“To achieve this, it is vital that consumers have an appropriate level of protection if things go wrong – and that we find a fair and sustainable way of funding the cost of this protection. Now is the time to ask how we can ensure our compensation framework is fit for the future.

“We are already taking action against the drivers of compensation claims. These include our measures to reduce the impact when firms fail and to tackle misconduct in the investment market.”

The FCA said it is now seeking views about the purpose, scope and funding of the current compensation framework, to ensure it continues to meet the needs of consumers and firms.

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