The Financial Conduct Authority has published a discussion paper aiming to improve the compensation framework of financial services.
The paper specifically looks at how the Financial Services Compensation Scheme (FSCS) is funded.
The lifeboat fund’s operating costs and compensation payments come from levies on financial services firms.
Over the last decade, the overall FSCS levy has increased from £277m in 2011/12 to an expected £717m for 2021/22. This is an almost 160% increase in a decade.
The FCA said that many of the claims driving these costs relate to historic misconduct by firms in the investment sector.
That includes financial advisers and Sipp operators.
The FCA said it wants to stabilise and reduce the size of the compensation levy over time and is taking “assertive action” to address the causes of the increase in compensation liabilities.
It intends to improve the conduct of firms to prevent harm from happening in the first place.
FCA executive director for consumers and competition Sheldon Mills says: “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.”
The regulator expects the number of historic claims to result in further FSCS payouts over the coming years.
Reacting to the discussion paper, FSCS chief executive Caroline Rainbird says: “Against a backdrop of rising consumer harm driving a year-on-year rise in compensation costs, I believe it is an important time to consider the composition of the compensation framework and whether it still functions in the most efficient and appropriate manner.
“We are working in a rapidly evolving marketplace and reviewing what and who FSCS can protect through our compensation service is an important discussion to have – both for today and into the future.
“Reducing protection for vulnerable people who have lost what can be their life’s savings, or their chance at a happy retirement, is not something FSCS agrees with. But, reducing harm from occurring and having a framework that enables us to put as many people as possible back on track most certainly is.
We have seen the impact the levy has on some firms who make a positive contribution to the UK market. They tell us it is unfair, and in some cases unaffordable. Something must change.”
She adds: “It is important to note that this review is not looking at how FSCS operates. The team continue to provide the customers of failed financial services firms with excellent service, paying compensation where we are able to do so in an efficient and fair manner.
“We have faced criticism from some levy payers over the size of their FSCS bill in recent years, but these costs are only a symptom – driven by the root cause of poor consumer outcomes.
“We welcome the timing of the FCA’s discussion paper and look forward to hearing a range of views being presented from industry and consumers alike. I would encourage anyone interested in the future of financial services and consumer protection to put forward their thoughts for consideration.”