Many people within the financial services industry may have been cheered by the newly-announced changes to funding arrangements for the Financial Services Compensation Scheme (FSCS) – the organisation that protects customers of firms that have become insolvent.
The FSCS’s sole source of funding is a levy on firms authorised by the Financial Conduct Authority (FCA). The existing system has been criticised in a number of ways in recent years, for example the FSCS has recently handled a lot of claims relating to Self-Invested Personal Pensions, and many firms have been forced to foot the bill for this even though they may never have sold that product.
Following a consultation, the FCA has confirmed that the following changes will take effect from April 1 2019:
- The Life and Pensions Intermediation funding class is to be merged with the Investment Intermediation funding class
- Pure protection intermediation is to be moved from the Life and Pensions Intermediation funding class to the General Insurance Distribution funding class
- Product providers will be required to contribute 25% of the funding requirement for the insurance and investment intermediation funding classes
- The existing compensation limit for investment provision, investment intermediation claims, home finance intermediation claims and debt management claims will increase from £50,000 to £85,000
- The existing compensation limit for long-term care insurance will change from £50,000 to 100% of the claim, bringing it in line with other pure protection products
The FSCS has also recently announced a significant increase in the levy to be paid by authorised firms for the 2018/19 financial year. The total levy on firms will be £407 million, some £71 million higher than forecast in the FSCS Plan and Budget. The levy on life and pensions advisers has risen by £52 million, and investment advisers will be subject to a levy that is £18 million higher than forecast.
Mark Neale, Chief Executive of FSCS, said:
“The levies announced today provide for the steady increase in claims and compensation costs related to retirement saving. Risks rise as people make increasingly complex choices about the investment of their pension pots, even where investors take the sensible step of taking independent professional advice.
“Many claims reflect bad advice to transfer pension savings from occupational schemes into Self-Invested Personal Pensions, usually with a view to invest in illiquid and risky unregulated products.
“Claims for such advice fall on life and pension advisers. However, as last year, we expect that compensation costs falling to this sector in 2018/19 will exceed the class limit and result in a call on other industry sectors in the retail pool.”
The Personal Investment Management & Financial Advice Association (PIMFA), a trade association that represents financial advisers and wealth managers, said it “greatly welcomes the final rules” announced by the FCA, especially the new requirements for providers to make contributions. However, noting the increase in the 2018/19 charges imposed on firms, PIMFA also called on the FCA to do more through its supervisory activities to mitigate the size of the levy.
The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article