The Financial Conduct Authority (FCA) has launched a discussion paper seeking views on how the financial services compensation framework could be improved.

Its paper includes ‘fundamental questions’ about the purpose, scope and funding of the parts of the compensation framework that the FCA is responsible for to ensure that it meets the needs of consumers and firms.

The FCA noted that the Financial Services Compensation Scheme (FSCS) levy has increased from £277m in 2011/12 to a predicted £717m in 2021/22, while the pipeline of historic claims is expected to result in further payouts “over the coming years”.

These increasing claims against failed firms have “focused attention” on the compensation framework and the cost to levy payers, with the paper therefore aiming to open a discussion on which aspects of the framework could be improved.

The regulator stated that it was committed to stabilising and reducing the size of the compensation levy over time and is taking “assertive action” to address the causes of the increase in compensation liabilities by improving the conduct of firms to prevent harm from happening.

Its paper is also seeking views on the purpose of the compensation framework and the principles that should underpin its design.

Furthermore, it aims to explore opportunities for improving the aspects of the current compensation framework that the FCA is responsible for, and to generate views and ideas that could be developed into specific policy proposals for future consultation by the FCA.

It asked potential respondents how to ensure the FSCS is not over-relied on, whether a change in scope could be justified, whether changes to the level of compensation should be made, and what they thought about the current funding model for the framework and whether any alternative models could be preferable.

“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,” commented FCA executive director for consumers and competition, Sheldon Mills.

“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 discussion paper is open until 4 March 2022, with the FCA planning to publish a feedback statement during 2022 that will outline any further steps it intends to take.

Commenting on the launch of the discussion paper, Aegon pensions director, Steven Cameron, said: “The FSCS plays a vital ‘last resort’ role in protecting consumers on the failure of a firm responsible for financial detriment. But despite previous attempts to improve the funding, and providers now paying a share of intermediary levies, many adviser firms who consistently offer their clients a professional service, and don’t give rise to compensation payments, feel unfairly treated as levies continue to rise sharply.

“We welcome this new opportunity to think again about how to strengthen the concept of ‘polluter pays’. Many favour a move to risk-based levies, so it’s disappointing that the FCA continues to see this as unworkable despite the new data it has been collecting on higher risk activities.

“We fully support the FCA’s efforts to tackle the root cause of compensation payments and look forward to more details of how FCA initiatives such as the new Consumer Duty and the Consumer Investments Strategy might help here. Alongside these, we encourage the FCA to continue to clamp down on phoenixing and to get smarter at identifying firm-level issues as early as possible.”

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