Shake-up of financial protection rules on the cards

14 December 2016

A shake-up of the rules that protect consumers when financial services firms go bust has been proposed by the regulator.

The Financial Services Compensation Scheme (FSCS) is the UK’s statutory compensation scheme of last resort, which protects deposits in banks, building societies, and credit unions, as well as certain insurance, investment and pension products when a provider fails.

In 2015/16, the scheme paid out £271 million in compensation to consumers and received over 46,000 new claims.


But the FCA, which is responsible for regulating certain types of insurance sales and investment provisions covered by the fund, has today proposed some changes to the scheme.

The key proposals that it has laid out include:

Extending the protection limits offered for pension products in light of the pension freedoms. Currently, someone who buys a particular investment product is in the same position for FSCS limits regardless of whether it is held in an individual savings account (Isa), self-invested personal pension (Sipp) or a defined contribution occupational pension scheme. But the pension freedoms have resulted in more consumers investing their pension funds on retirement in drawdown products instead of insurance-based annuities. The compensation limit for drawdown products is capped at £50,000 but for insurance-based annuities it is 100% of the loss with no upper limit. The FCA will look at whether these limits should be extended.

Introducing FSCS cover for debt management firms. This would cover UK based firms that hold clients’ money. The proposal has come about amid concerns that some firms provide debt advice that may not be in the customer’s best interests, and that customer’s money is not always adequately protected, accounted for or passed to creditors in a timely manner. 

Introducing FSCS cover for the advice and intermediation of structured deposits. The FCA is concerned that investors may be at risk of mis-selling if, for example, they have been wrongly advised about the suitability of the particular investment risk or its term and liquidity. Structured deposits give investors the opportunity to achieve greater returns by linking their performance to particular stock market indices over a fixed term. Investors are guaranteed the full return of their initial deposits, while the remaining ‘structured payoff’ depends on how well the underlying investments have done.

Considering whether to extend FSCS protection to crowd funding and financial promotions for investment activity. In both cases the FCA doesn’t believe there is a strong enough argument to extend protection in these instances, but it wants to hear other views on this.  

The regulator will also review its rules on how the scheme is funded – which is currently by a levy on the industry. However, it does warn that the costs of FSCS levies may be passed on to consumers.

Responses to the consultation can be submitted to the FCA by 31 March 2017, and a further consultation paper on proposed rule changes will be published in autumn 2017.


Christopher Woolard, executive director of strategy and competition at the FCA says: “The Financial Services Compensation Scheme plays a vital role in ensuring consumer confidence in financial services.

“We want to ensure protection for consumers and fairness for firms that pay for the compensation. We want to have a full debate with all interested stakeholders and this paper sets out the range of fundamental issues we want to discuss.”

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