FCA launches discussion on improving the financial services compensation framework

The Financial Services Compensation Scheme (FSCS) provides compensation when certain authorised financial services firms are unable to meet claims against them. The FSCS plays a critical backstop role in protecting consumers and ensuring confidence in financial services markets.

The FCA is seeking views on fundamental questions about the purpose, scope and funding of the FCA's compensation framework to ensure it continues to meet the needs of consumers and firms.

The FSCS’ operating costs and compensation payments are funded by levies on financial services firms. The overall FSCS levy has increased over the last decade, from £277 million in 2011/12 to an expected £717 million for 2021/22. Many of the claims driving these costs relate to historic misconduct by firms in the investment sector, including financial advisers and Self-Invested Personal Pension (SIPP) operators, which have subsequently failed. This pipeline of historic claims is expected to result in further FSCS payouts over the coming years.

The FCA is also committed to stabilising and reducing the size of the compensation levy over time. The regulator is taking assertive action to address the root causes of the increase in compensation liabilities by improving the conduct of firms to prevent harm from happening in the first place. The FCA is also improving the financial resilience of firms so they are better able to meet their own redress liabilities and put things right for consumers.

Sheldon Mills, the FCA’s Executive Director for Consumers and Competition, said: 'We want consumers to have trust in a thriving UK financial services sector, and businesses to be confident that they can bring new and innovative products to market. To achieve this, it is vital that consumers have an appropriate level of protection if things go wrong – and that we find a fair and sustainable way of funding the cost of this protection. Now is the time to ask how we can ensure our compensation framework is fit for the future.

'We are already taking action against the drivers of compensation claims. These include our measures to reduce the impact when firms fail and to tackle misconduct in the investment market.'

Notes to editors 

1. Read DP21/5: Compensation Framework Review[1]. The FCA is inviting responses to the Discussion Paper by 4 March 2022.
2. The FCA and Prudential Regulation Authority (PRA) are each responsible for making rules in relation to the FSCS. The PRA is responsible for rules relating to claims in connection with deposits, insurance provision and dormant accounts; the FCA is responsible for claims in connection with all other relevant types of financial services activities that are protected by the FSCS. This discussion paper is focused on the aspects of the FSCS rules that the FCA is responsible for.
3. The compensation framework was last reviewed by the FCA between 2016 and 2018.
4. The FCA published its Consumer Investments: Strategy and Feedback Statement in September 2021, where we set out our view of consumer harm in the consumer investments market and our 3-year strategy to address this.
5. The Investment Firms Prudential Regime will come into effect in January 2022, placing new requirements on firms that will mean they are better prepared for an orderly wind down. The FCA will also be reviewing its prudential regime for non-MiFID investment firms in the coming months.
6. The 2011/12 FSCS levy figure above excludes costs relating to the banking crisis.