FCA announces next steps on improving the compensation framework

The FSCS provides compensation when certain authorised financial services firms are unable to meet claims against them. The FSCS provides vital protection for consumers and helps ensure confidence in financial services. 

The review was launched following concerns about the increasing cost of compensation liabilities falling to the FSCS, which could create a barrier to firms entering or wishing to stay in the market, potentially affecting the availability of some financial services. The review aims to make sure the compensation framework continues to provide an appropriate level of consumer protection, with costs to industry distributed in a fair and sustainable way supporting innovation and growth.   

The main theme from the feedback was the importance of firms improving their conduct so there were fewer calls on the FSCS from mis sold products by failed firms. Feedback also focused on the need for firms to be more financially resilient to address the underlying causes of high redress liabilities. 

For the next phase of the review, the FCA is planning to: 

• review compensation limits to consider whether they remain at an appropriate level for different types of claims 
• review funding class thresholds to consider whether the class thresholds remain at an appropriate level 
• carry out consumer and firm research, in conjunction with the FSCS, to improve the FCA’s understanding of the impact of FSCS protection on consumer decision making, confidence and behaviour, and on firm behaviour and incentives 

Sheldon Mills, Executive Director of Consumers and Competition at the FCA, said: ’We welcome the constructive engagement and feedback which will inform the next phase of this work.   

’We want to make sure the cost to industry for providing vital protection to consumers through the FSCS is distributed in a fair and sustainable way – that the polluter pays. We’re continuing our assertive action to prevent harm from happening in the first place, which should help reduce the levy over time.’ 

The FCA is already taking action to tackle the root causes of high redress liabilities and crack down on problem firms as part of its consumer investments strategy. This includes:   

• being tough at the gateway to prevent firms that could cause harm from entering the market, with one in five firms rejected for authorisation  
• placing twice as many restrictions on firms to prevent them from promoting or selling certain products and services 
• using emergency powers to prevent financial advice firms, who advised members of the British Steel Pension Scheme (BSPS), from disposing of assets to avoid paying compensation. 

Notes to editors

1. FS22/5: Compensation framework review 
2. FCA places restrictions on twice as many consumer investment firms this year 
3. Consumer investments strategy – 1 year update  
4. FCA announces asset retention rules for British Steel advice firms