FCA launches discussion on FSCS levy framework


The Financial Conduct Authority has published a discussion paper aimed at improving the financial services remuneration framework.

The paper specifically looks at how the Financial Services Compensation Scheme (FSCS) is funded.

The lifeboat fund’s operating costs and compensation payments come from levies on financial services companies.

Over the past decade, the overall FSCS levy has risen from £277m in 2011/12 to an expected £717m in 2021/22. This is an increase of almost 160% in a decade.

The FCA said many of the claims driving those costs relate to historical misconduct by firms in the investment industry.

This includes financial advisors and Sipp operators.

The FCA said it wanted to stabilize and reduce the amount of the indemnification tax over time and was taking “strong action” to address the causes of the increase in indemnification obligations.

It aims to improve business conduct to prevent harm from occurring in the first place.

FCA’s Executive Director for Consumers and Competition, Sheldon Mills, said: “We want consumers to have confidence in a thriving UK financial services sector and businesses to be confident that they can bring new and innovative.

“To achieve this, it is essential that consumers have an appropriate level of protection should something go wrong – and that we find a fair and sustainable way to fund the cost of that 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 businesses fail and to tackle misconduct in the investment market.”

The regulator expects the number of historical claims to translate into further FSCS payments over the next few years.

Reacting to the discussion paper, FSCS Chief Executive, Caroline Rainbird, said: “Against a backdrop of growing harms to consumers leading to annual increases in compensation costs, I believe it is important to examine the composition of the compensation framework and whether it still operates in the most efficient and appropriate manner.

“We work in a rapidly changing market and looking at what the FSCS can protect and who can do it through our claims service is an important discussion to have – both now and in the future.

“Reducing protection for vulnerable people who have lost what may be their life’s savings, or their chance for a happy retirement, is not something the FSCS agrees with. But , reducing damage and having a framework that allows us to get as many people back on track as possible most certainly is.

We have seen the impact of the tax on some businesses that make a positive contribution to the UK market. They tell us it’s unfair and, in some cases, unaffordable. Something has to change.

She adds: “It is important to note that this review does not address the operation of the FSCS. The team continues to provide clients of bankrupt financial services companies with excellent service, paying compensation where we are able to do so in an efficient and fair manner.

“We have been criticized by some royalty payers over the amount of their FSCS bill in recent years, but these costs are only a symptom – driven by the root cause of poor consumer outcomes.

“We welcome the timing of the FCA Discussion Paper and look forward to hearing a range of views from industry and consumers. I encourage anyone interested in the future of financial services and consumer protection to submit their thoughts for consideration.

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