Although over the years the Financial Services Compensation Scheme (FSCS) has done a great deal to ensure that customers of failed firms do not lose out, recent events have illustrated the limitations of the cover provided by the FSCS.
For a long time, it was generally assumed that where a firm was authorised by the Financial Conduct Authority (FCA), FSCS protection would be available. However, in recent years all of the UK’s thousands of consumer credit firms have been brought into the FCA regime, as have the claims management companies, yet FSCS cover is not provided in either case.
There have of course been two high-profile failures of larger payday lenders in recent months, and anyone with a valid complaint against these lenders cannot take the matter to the FSCS or to the Financial Ombudsman Service. Instead, these customers have been forced to apply to the administrators of the failed lenders to register as unsecured creditors, and the expectation is that they will receive very little in the way of compensation.
Parliament’s Treasury Select Committee has highlighted that this is an undesirable situation, but in the short term at least, no alternative scheme will be put in place to compensate customers of failed credit firms.
Other recent events have also highlighted where FSCS protection may be limited in the pensions and investment sectors. Although the firms themselves may be regulated by the FCA, some of the products they offer may not be regulated, or if the products are regulated, some of the underlying investments may fall outside the scope of regulation.
Perhaps the most notable recent example of this was the collapse of a firm that issued mini-bonds. The customers of this firm were initially led to believe that they had no recourse to the FSCS, and that the bonds were unregulated. Administrator Finbarr O’Connell told the BBC Radio consumer finance programme Money Box that the 14,000 bondholders might expect to get no more than 20% of their money back, and that they might have to wait up to two years to receive it.
Now customers of the firm have been asked to contact the Service and register for updates on the situation. The FSCS says it is working closely with the FCA, the firm’s administrators and external legal advisors, and says that it will “continue to explore whether there are grounds for compensation”, and that “after further analysis of [name of firm]’s business practices, investment materials, and calls recorded with investors, FSCS is now investigating whether regulated activities were in fact carried out which might give rise to a claim.”
A spokesperson for the FSCS added:
“It is clear that [name of firm] investors were badly let down so to help we want to be as transparent as possible over our process. By registering with us they will get regular updates on our investigation and this will be the best way for them to hear whether we believe there are grounds for compensation. This is a highly intricate case though, so we expect our investigation may take some time. We appreciate investors’ need for certainty so we can assure them that we are treating the case with the utmost urgency.”
Some of the bondholders have told the Financial Times that, prior to investing, they contacted the FSCS and were assured that their investment would be protected.
Certain individuals associated with the firm that issued the bonds are now being investigated by the Serious Fraud Office, and the FCA has ordered an independent investigation into two specific issues:
- Whether the existing regulatory system adequately protects retail purchasers of mini-bonds
- Whether the FCA adequately supervised the firm
16 MPs have signed a motion calling on FCA chief executive Andrew Bailey to resign due to his organisation’s handling of this matter.
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