FSCS – changes afoot
Written by Charlie Palmer on 10/08/2018

In its third consultation paper on this topic, the FCA has confirmed:

  • FSCS claims for investment advice will benefit from an increased compensation cap, from £50,000 to £85,000;
  • Product providers will start making contributions to FSCS funding for insurance and investment advice claims.

These rules are to take affect from April 2019. 

Product providers will now be required to contribute 25% of the funding requirements for the FSCS' insurance and investment intermediation funding classes. In other words, product providers will have to help to pay for IFA’s misselling their products.

In a blow to IFA firms who have upgraded their licences to include DFM, and to smaller advice led DFM firms, The FCA has confirmed that these plans will include DFM as “providers.” Close attention needs to be paid to the fee data entries made to FCA each year.  IFAC’s system of recording turnover helps to give consistent returns, and splits down the turnover entries as they come in.  Use of this feature should be encouraged. 

In addition there is a consultation on the table….

  • FCA proposes controversial rules to force Compliant Professional Indemnity Insurance to cover for claims where the firm or a third party becomes insolvent.

The reasoning behind this is clear, with the FCA confirming "the changes are intended to ensure that more consumer claims are paid by insurers which could help to reduce the costs of the FSCS to other firms."  

IFAC have long argued – contrary to the rest of the IFA media it seems – that the industry needs to bail out and take responsibility for failed advice firms.  The difference is that PII exists to protect companies, whereas FSCS prime objective is to protect consumers. 

The different emphasis between the two is most stark when facing claims from disgruntled clients of failed advice firms.  FSCS in general terms pay out; PII in general terms will want to see a convincing case made before dipping into policy-holder reserves.

Famously FSCS have paid out on claims such as Arch Cru, on a blanket basis.  This extra pay out was often strongly influenced by hindsight – and we are all clever dicks with hindsight.   Some clients were willing to invest in ultra-high risk schemes, and their SR documented this fact and their failure should not have been underwritten by our industry.   The same goes for many Unregulated collectives, some of which are or were perfectly rational investments - for instance, pubs being purchased by the local villagers – but nonetheless some fail, and when they do FSCS appears to pay out willy-nilly.

Claims do, of course , rocket when firms go into administration or insolvency, and this worries PII industry.  But the extra cost should be reflected in our premium.  Indeed FSCS costs should fall dramatically with this move, and total costs will fall if the PII take a more commercial view on claims.  IFAC see this move as a de-nationalisation of one sector of our industry, and believe that we should welcome the move as remarkably sensible.  

This consultation will remain open until 1 August 2018 – get your view in now!

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