In November 2016, the FCA consulted on changes to some of the rules that govern the operation of the Financial Services Compensation Scheme (’FSCS’), the UK’s statutory compensation scheme of last resort. Receiving over 40,000 claims per year and paying out in excess of £271million in compensation in 2015/2016, the FSCS is one of the more robust tools used by the regulator to carry out its consumer protection mandate.

The consultation focused on funding and proposed that there be an increase in the non-investment (general and pure protection) insurance mediation compensation limit from 90% to 100% for claims in relation to certain types of insurance. It also proposed that changes be made to the eligibility of trustees of occupational pension schemes to claim on the FSCS and that where a successor firm is in default, and where the FSCS requires assistance in handling claims, express reference should be made in the compensation rules to how the compensation rules apply.

Currently contributions to the FSCS are required from intermediaries in the general insurance, life insurance and home finance insurance markets with the scheme being able to seek contributions from certain firms in the consumer credit market. The majority of FSCS levies however arise not from insurance firms or consumer credit firms but from firms which have given unsuitable investment advice to their customers.

Currently, contributions to the FSCS are required from intermediaries in the general insurance, life insurance and home finance insurance markets with the scheme being able to seek contributions from certain firms in the consumer credit market. The majority of FSCS levies however arise not from insurance firms or consumer credit firms but from firms which have given unsuitable investment advice to their customers.

Faced with the challenge of reconciling affordability for firms that pay a levy with the protection of the interests of consumers, the FCA requires that Personal Investment Firms (PIFs) take out PII cover. A remaining issue though is the availability of appropriate policies because with relatively few providers of PII servicing the PIF market and with existing policies often failing to cover the full gamut of the risk, underinsurance remains an issue. As a result, when investment firms fail or are found to have acted negligently, it is often the FSCS which steps in to protect the consumer.

There are also specific proposals as regards FSCS funding that will be consulted on in the coming months. These include the extension of FSCS coverage for some aspects of fund management, debt management and structured deposit intermediation and contributions to the FSCS from Lloyd’s.

A review of the market will be conducted by the FCA this year as the regulator is concerned to ensure that along with rectifying the above, there is sufficient funding and risk management to protect the consumers interests and to protect the integrity and feasibility of the FSCS. The review will therefore look at the extent to which the relatively high level of levies should be considered in the context of an individual (levied) firm’s risk profile.

There are also specific proposals as regards FSCS funding that will be consulted on in the coming months. These include the extension of FSCS coverage to some aspects of fund management, debt management and structured deposit intermediation and contributions to the FSCS from Lloyd’s.

Firms are encouraged to familiarise themselves with both the FCA’s final rules as they relate to FSCS consumer protection and to keep abreast of the changes and amendments which may come into place. Being aware of impending change and being responsive to the FSCS when engaged by the scheme are the best way to steer clear of the unwanted burden of additional regulatory scrutiny and the potential disruption of an FSCS levy.

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