The Financial Conduct Authority (FCA) will review the way the Financial Services Compensation Scheme (FSCS) is funded by the industry and the level of protection it offers.
The FCA ruled out the possibility of a moving to a risk-based funding model but acknowledged the strength of feeling in the industry about how the FSCS is funded.
A year ago the regulator began a discussion about the lifeboat fund as strong feelings continued to be raised about parts of the industry funding poor advice and failings from other sectors.
Those views were made clear in the discussion paper which the FCA replied to.
“We agree with many respondents that there is a need to review the current funding classes to ensure thresholds remain appropriate and do not result in unintended unfairness,” it said.
“We will therefore carry out a review of the current funding classes to look at the constitution of classes, the ability of firms to meet costs, and the risks the classes are exposed to.
“An aim of this funding class review will be to ensure that the class thresholds remain at an appropriate level and to minimise the frequency of calls on the retail pool.
“This review will also consider the feasibility of introducing periodic reviews of the class thresholds so that we are clear and transparent in how and why these are set considering changing conditions over time.”
The Retail Pool has been triggered four times in the last 10 years.
In 2020/21 the General Insurance Distribution funding class, which includes most protection and health insurance advisers, had to pay out £23m for failures in the Life Distribution & Investment Intermediation as claims exceeded that class’s £330m limit, with the Home Finance Intermediation funding class also contributing £3m.
However, the FCA rejected suggestions to introduce a risk-based funding model, adding it had not heard any views through feedback that other funding models, such as a pre-fund or product levy, would be preferable to the current arrangements.
High-risk investments
The FCA was receptive to ideas about reducing FSCS protection for certain non-standard or high-risk investment types or the activities associated with them such as distribution and advice.
“After considering the feedback received, we remain open to exploring further opportunities to restrict the scope of protection to potentially exclude certain activities or product types in the future,” the FCA said.
“However, we are clear that before we can make any such changes, we need to ensure that all the appropriate regulatory safeguards are in place to protect consumers from harm.”
Better firm conduct
Ultimately the FCA noted the prevailing feedback was the high cost of compensation liabilities falling to the FSCS is not a feature of the compensation framework itself, but because of the harms from certain markets.
“Stakeholders felt the most effective way to bring down the cost of claims falling to the FSCS was for firms to improve their conduct to minimise the liabilities in the first place and to be more financially resilient,” it continued.
“There was no clear appetite to bring the costs down in other ways such as removing aspects of consumer protection provided by the FSCS.
“It was acknowledged that this would merely shift the burden of the costs to the consumer, who would be unprotected if a firm failed.”
The regulator said it would consult on any proposed changes to the compensation rules during 2023/24 with a view to confirming any changes by the end of that financial year.