The Financial Conduct Authority (FCA) has published a consultation paper today (6th December) to seek views on whether there should be changes to the protections afforded by the Financial Services Compensation Scheme (FSCS).
Wealth Management Advisors have been concerned about the cost of the FSCS for some time now. The costs of the scheme are paid by individual advice firms in relation to their size, but with minimum contributions levels. The scheme is expected to cost almost £750 million next year.
These costs directly affect customers because advice firms typically pass the increased costs on in the form of higher advice charges. This in turn worsens the “advice gap” where people can’t afford to access professional advice services. So, the FCA is having a look at the scope of the scheme’s protection. Some of the proposals it will look at include:
- Removing any protection for High Net Worth (HNW) individuals. The argument is that HNW individuals are more likely to be able to stand the costs of any losses which might have resulted in FSCS claims. The FCA has looked at its historic claims and identified that only 5% of claimants earned over £100,000 a year for example. That means that HNW clients might only form a small percentage of claimants, but costs disproportionately more than the majority?
- Taking away protection for claims relating to “advice” about investments. This could help cut the costs of the scheme because over £300 million in compensation was paid out for investment advice issues. On the flip side of course, that’s £300 million that wouldn’t be available to compensate ordinary investors. The worry is that this could affect consumer confidence in the advice process.
- Identifying products which fall outside the scope of the FSCS remit. Crypto currencies for example are not covered and a list could be considered to include more complicated and financially sophisticated products which are not usually “bought” by the general public. One of the issues that advisers have had with the scheme in the past is that it has been used to cover claims which were outside its scope. The recent mini bonds scandal comes to light where the FSCS picked up the tab for unregulated products sold by unregulated firms who had never paid into the scheme. The FCA is concerned however that managing list of products might be too complicated.
The consultation process will last until next May, so nothing will change in the short term.