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Outgoing FSCS CEO calls for more targeted approach to financial protection

13 March 2019

Outgoing Financial Services Compensation Scheme (FSCS) chief executive Mark Neale has called for the regulator to prioritise protection of consumers, with over half of compensation costs resulting from mis-selling or bad advice.

In his speech to the UK Finance’s Retail Banking Summit, Neale said over 60% of the £3.3 billion paid out in compensation during his nine-year tenure was due to mis-selling and bad advice, with a significant proportion arising from transferring money from occupational schemes in order to invest in risky and illiquid assets.

FSCS has paid out compensation of £581 million for such claims in the five years since 2014/15, compared to just £80 million in the four years prior to the pension freedoms.

According to Neal, the industry would benefit from a more targeted approach in protecting consumers, with the wide range of retirement products currently protected making it difficult for consumers to understand. He believes FSCS should exclude a number of unregulated investment and retirement products that have led to the increased FSCS pay-outs in recent years.

Alongside this, Neal argued that the level of compensation for this targeted range should be significantly increased so that no consumer is at risk of losing a major part of their pension if they are mis-advised about how to invest.

He said: “FSCS’s compensation payments are an index of a market in trouble, which is highlighted by the fact that claims and payouts are rising. It results from a market characterised by a bewildering array of products, by complexity – some deliberate – and by profound information asymmetry.

“It is delusional to think that any regulator could police such a fragmented market to anticipate harm before it manifests itself, rather than to react to its occurrence. Consequently, I advocate prioritising protection of the consumer over maximising choice. This means better and clear incentives to save for retirement; simpler products and more default options; and better targeted communications, including about FSCS, when they matter to consumers.”

In his speech, Neal also said pension products could be kite marked by the FCA to ensure confidence among consumers that they are buying good value, which he believes will be particularly helpful to consumers who do not have strong views of their own.

Responding to Neale’s comments, Pensions director at Aegon Steven Cameron said:

“The suggestion that unregulated investments should be taken outside the scope of the FSCS is bold, but worth considering, provided this doesn’t dilute consumer protection. Unregulated investments have been a key source of increases in compensation claims.

Some have wrongly blamed Self Invested Personal Pensions, but many SIPPs including Aegon’s, do not allow unregulated investments.

We’ve previously called for those advisers recommending unregulated investments to pay higher FSCS levies, effectively moving to ‘risk based levies’ so those firms undertaking riskier activities, more likely to result in FSCS claims, pay more in. Mark Neale’s proposal goes further. At Aegon, we don’t believe unregulated investments have a role in mainstream financial services products including drawdown.

“FSCS levies have risen sharply in recent years, placing an increasing burden on the vast majority of professional advisers who don’t generate claims. The many who have never made such recommendations are paying, both in terms of reputation and financially, for the unsuitable advice of the very few.

“Anything which cuts down the compensation bill without adversely affecting consumer protection should be given serious consideration.”