Mark Neale made his final speech as chief executive of the Financial Services Compensation Scheme (FSCS) when he addressed the UK Finance Retail Banking Conference.
Mr Neale acknowledged that in his nine years in office, the FSCS has paid out £3.3 billion in compensation, and that these costs were initially borne by the industry (via levies on regulated firms), but that ultimately much of this cost would have been passed on to consumers. However, whilst he acknowledged that the nature of a competitive market meant that firms would on occasion become insolvent, he was disturbed to report that around £2 billion (approximately 60%) of this compensation was paid as a result of mis-selling of products such as payment protection insurance, death bonds and overseas property funds. He suggested that this situation had arisen as many consumers find financial products hard to understand, and often don’t even want to try to understand them. Instead, these consumers rely on firms to give them good advice and support, and these firms have not always risen to the challenge.
Here, Mr Neale commented:
“When an adviser comes along – regulated or unregulated – and offers the beguiling prospect of great returns at no risk from death bonds, or overseas property, or storage pods, consumers sub-contract the decision with relief.”
The FSCS chief then said that another reason why his organisation had been forced to step in so often was that small firms typically hold little in the way of capital resources, and that while they may have had professional indemnity insurance, these policies often carried an excess that was greater than the firm’s capital level. As a consequence, some firms may have failed simply because they received a smaller number of mis-selling claims.
Another hard-hitting comment he made here was that “consumers are too ready to trust unscrupulous or incompetent advisers who do not have the financial resources to put right the harm they do.”
Some solutions for the future suggested by Mr Neale included:
- Providers should design less complex products, allowing the average person to understand them
- Financial education should be better targeted
- The regulators could increase the capital resources requirements, but not by so much that it leads to significantly more business failures
- Advisory firms could form networks or partnerships, and thus make it easier to meet quality control standards
- The limit on the protection afforded by the FSCS to those saving for their retirement could be increased significantly – here he said that “in the new world, our customers will tend to have more complex claims and more will often be at stake”
- The regulators could prohibit more complex products from being promoted to mainstream consumers
On May 4, Mr Neale will be succeeded at the helm of the FSCS by Caroline Rainbird, who has held the posts of managing director of regulatory affairs and director of corporate services at RBS, and chief financial officer at ABN Amro.
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