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3 December 2021

On the 3rd of December, the Financial Conduct Authority (“FCA”) launched a Discussion Paper aimed at maintaining a compensation framework that provides appropriate protection for consumers, funded in a fair and sustainable way.

The FCA is seeking views on key fundamentals about the purpose, scope and funding of the FCA’s compensation framework. The regulator hopes to ensure that the compensation framework continues to meet the needs of consumers and firms.

The Financial Services Compensation Scheme (“FSCS”) is the UK’s statutory ‘fund of last resort’ for customers of authorised financial services firms. The FSCS provides compensation when certain authorised financial services firms are unable, or likely to be unable, to meet claims against them. The FSCS plays a critical backstop role in protecting consumers and ensuring confidence in financial services markets.

The FSCS’s operating costs and compensation payments are funded by levies on financial services firms. Increasing compensation costs seen in recent years have prompted questions about the fairness of FSCS levies and how the FSCS should be funded.

The FCA’s discussion paper aims to start of a discussion with stakeholders on the compensation framework and the purpose, scope and funding of the FSCS. The regulator wishes to identify opportunities to improve the aspects of the framework which the FCA is responsible for and, to ensure the framework remains appropriate and proportionate in order to benefit all market participants.

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 compensation over the coming years.

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 committed to stabilising and reducing the size of the compensation levy over time.

Responses to the discussion paper must be sent via the online form or by email to dp21-05@fca.org.uk  before 4 March 2022.

By Ian Beardmore

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