Memorandum submitted by the Financial
Services Compensation Scheme (FSCS)
INTRODUCTION
The creation of the Financial Services Compensation
Scheme (FSCS) marked an important step in the promotion of financial
inclusion.[123]
By rationalising compensation arrangements, and designing a scheme
which aims to protect those least able to sustain financial losses,
FSCS contributes to building confidence for those most vulnerable
to financial exclusion. We anticipate this will result in greater
take up of financial products generally, including low cost credit.
EXECUTIVE SUMMARY
FSCS promotes financial inclusion through:
1. Safeguarding vulnerable consumers from
financial loss.
2. Increasing confidence in financial products
amongst disadvantaged groups.
3. Helping providers to supply low cost products.
4. Providing accessible information.
1. SAFEGUARDING
VULNERABLE CONSUMERS
Our core function is to protect consumers who
would otherwise have nowhere to turn in the event of the default
of a financial services firm.
— Since FSCS became operational, on
1 December 2001, we have paid out in excess of £600 million
in compensation.
— Compensation payments have been made
in many key areas of the financial services sector, including—to
policyholders of Independent Insurance Ltd, which became insolvent
in 2001; investors who were wrongly advised to transfer from an
occupational pension to a personal one and were worse off financially
as a result; consumers who were mis-sold investment products such
as "precipice" bonds and endowment policies; and members
of credit unions—often the most vulnerable of our claimants—who
face the loss of possibly their entire life savings when a credit
union becomes insolvent.
1.1 The number of consumers coming to FSCS
for help is increasing sharply. For example, FSCS dealt with 1,500
investment claims in 2002-03. This year (2005-06) we are forecasting
that over 25,000 such claims will be received. This is a challenge
for FSCS in terms of how we manage such dramatic increases in
claims, but it also highlights the importance of the scheme to
consumers who could otherwise face financial loss and hardship.
1.2 Compensation limits vary according to
the type of claim, and there are limits to the compensation FSCS
can pay. However, the scheme aims primarily to protect those who
are least able to sustain financial loss; therefore compensation
covers losses in full to a certain minimum level for each type
of claim. For details of compensation limits, please see Appendix
2.
2. INCREASING
CONFIDENCE IN
THE SECTOR
The availability of compensation is a key condition
for allowing more people to feel more confident when investing
in financial products. A MORI poll conducted by FSCS just before
it became operational in 2001 showed that the safety and security
of their money is one of the most important factors for consumers
when taking out investments, insurance or placing deposits.
2.1 Simplifying the system so that investors
have a single point of contact to access compensation when financial
firms can't meet claims made against them, helps to provide a
greater degree of confidence amongst consumers and increases awareness
of the protection available. FSCS undertakes a number of activities
to increase awareness of its role in the sector, for example by
working with consumer advice bodies, trade bodies, financial services
firms and journalists.
3. HELPING PROVIDERS
TO SUPPLY
LOW COST
PRODUCTS
Confidence in the market is an essential pre-requisite
of the availability of low cost products, which are needed to
allow greater access to services. The existence of FSCS promotes
financial stability by lessening the risk of a single failure
triggering a wider loss of confidence in that sector, or the market
generally.
3.1 Since July 2002, credit unions have
been eligible for protection through FSCS. Credit unions are community-based
financial cooperatives which are owned and run by their members.
They allow members to save and borrow with them at reasonable
rates of interest, crucially giving people on lower incomes access
to low-cost credit.
3.2 To date, in this sector FSCS has:
— declared 16 credit unions in default;
— helped 1,331 credit union members;
and
— paid out over £700,000 in compensation
to credit union members.
3.3 Money deposited with a credit union
now has the same "last resort" protection as savings
in banks and building societies.
4. ACCESSIBLE
INFORMATION
An important aim of the scheme is to provide
information to consumers in an accessible way, thereby making
them more aware of the protection available.
Our publications are accredited by the Plain
Language Commission and available in 11 different languages. Our
consumer guides are distributed through libraries, financial services
firms and Citizens Advice Bureaux, and available from our website.
Our website is continually developed and updated, and a new interactive
service for potential mortgage endowment claimants is due to be
launched during 2005-06.
4.1 We issue regular press releases targeted
at local communities to let consumers know of firms in their area
that we have declared "in default", which opens the
way for consumers to claim compensation from us.
4.2 We have a dedicated Customer Services
Team who deal with thousands of enquiries from consumers each
week. For example, during the financial year 2004-05 over 78,000
consumers contacted FSCS for advice on how to make a claim.
CONCLUSION
The existence of FSCS is an essential element
in the protection of consumers, thereby reducing the risk of financial
difficulties and resultant social and financial exclusion.
January 2006
APPENDIX 1
CASE STUDY
We provide below a case study of how FSCS has
helped a typical claimant.
Mr and Mrs X wanted to invest some money to
cover an interest-only loan they had in order to clear their remaining
mortgage.
Mr X had been on an investment advice firm's
mailing list for some years and regularly received information
from them about investment products.
In October 2000 Mr and Mrs X were advised by
an investment firm to invest £32,000 in an income or growth
plan. However, the Xs were not told about the risks associated
with this type of product, and Mr X had previously stated that
he wished to follow a low to medium risk approach when investing.
When Mr and Mrs X realised that the investment
advice they had received was unsuitable for them, and they had
lost money as a result, they contacted the firm, but it had recently
become insolvent and was unable to consider their claim. They
contacted FSCS for help. "I was very impressed with the help
your staff gave me," says Mrs X. "With their help, I
managed to get my claim application in."
FSCS investigated the X's claim and were able
to pay them compensation for the losses they suffered as a result
of the bad advice they received.
"I was over the moon when I received the
offer of compensation from FSCS," says Mrs X. "It's
made a world of difference to me. It has enabled me to finish
my life with a degree of dignity, and security."
APPENDIX 2
FSCS KEY FACTS
FSCS is the UK's statutory fund of last resort
for customers of authorised finance sector firms, created under
the Financial Services and Markets Act 2000 (FSMA). FSCS can provide
compensation to consumers who have claims against firms that are
unable to pay them. The Scheme covers business conducted by firms
regulated by the Financial Services Authority (FSA), the watchdog
set up to regulate financial services in the UK and protect the
rights of consumers.
FSCS became operational on 1 December 2001 and
protects deposits, investment business and insurance contracts.
From 31 October 2004 the scheme was extended to include mortgage
advice and arranging, and, from 14 January 2005, business conducted
by general insurance brokers. It was set up mainly to assist private
individuals, although some smaller businesses are also protected.
COMPENSATION LIMITS
There are limits to the amounts of compensation
(per person) the Scheme can pay:
— For deposit claims (for example if
a bank, building society or credit union were to become insolvent),
the scheme can pay up to £31,700. This is made up of 100%
of the first £2,000 and 90% of the remainder of the loss.
— For insurance contracts, if an insurance
company becomes insolvent the scheme protects 100% of the first
£2,000 of a claim or policy, plus 90% of the remainder, with
no upper limit. Compulsory insurance contracts (for example third
party motor insurance) are protected in full. These limits also
apply to business conducted on or after 14 January 2005 by insurance
brokers.
— For investment claims the maximum
amount the scheme can pay is £48,000 (100% of the first £30,000
and 90% of the next £20,000). It can pay compensation for
financial loss arising from, for example, bad advice, negligent
investment management, misrepresentation and fraud. From 31 October
2004 advice given on all long-term care products is also covered.
— The scheme can pay up to £48,000
(100% of the first £30,000 and 90% of the next £20,000)
for claims against authorised mortgage advisers for business conducted
on or after 31 October 2004. FSCS may be able to pay compensation,
for example, if consumers lose money after being advised to enter
into a mortgage agreement that was unsuitable for them, or if
a mortgage adviser goes bust and owes money to its customers.
WHERE FSCS FITS
IN
To carry out regulated financial business in
the UK firms must be authorised by the FSA.
For complaints or claims against a firm that
is still trading, consumers should contact the Financial Ombudsman
Service.
If consumers have claims against a firm that
has insufficient assets to pay them, for example because it is
insolvent or has stopped trading, (described by us as being "in
default"), they can contact FSCS.
January 2006
FSCS replaced previous compensation schemes from
midnight on 30 November 2001, when the Financial Services and
Markets Act came into force, including: the Investors Compensation
Scheme, Deposit Protection Scheme, Building Societies Investor
Protection Scheme, the Friendly Societies Protection Scheme, Policyholders
Protection Scheme, the PIA Indemnity, the Section 43 Scheme, and
the ABI voluntary arrangement for widows, widowers and dependents
of deceased persons (under the pensions review).
123 The Financial Services Compensation Scheme (FSCS)
is the UK's statutory fund of last resort for customers of financial
services firms. FSCS provides protection if an authorised firm
is unable, or likely to be unable, to pay claims against it. FSCS
was created under the Financial Services and Markets Act 2000
(FSMA) and became operational on 1 December 2001. FSCS is an independent
organisation, funded by levies on authorised firms. Back
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