FCA launches financial services compensation framework discussion paper

The regulator says its Financial Services Compensation Scheme (FSCS) provides compensation when certain authorised financial services firms are unable to meet claims against them, playing a critical backstop role in protecting consumers. 

In this discussion paper, the FCA is seeking views on “fundamental questions about purpose, scope and funding” of the framework to ensure it continues to meet the needs of consumers and firms.  

The FSCS’ operating costs and compensation payments are funded by levies on the financial services firms. This has increased over the last decade - going from £277m in 2011/12 to an expected £717m for 2021/22

Many of the claims driving these costs relate to historic misconduct by firms in the investment sector which have subsequently failed, with the pipeline of historic claims expected to result in further FSCS payouts over the coming years. 

Commenting on the discussion paper, the FCA’s executive director for consumers and competition Sheldon Mills, said: “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.”