A review of the UK’s deposit-guarantee scheme could lead to protection being extended to consumer credit and see higher limits for compensation introduced for pensioners, the City watchdog has said.
These are two proposals to come out of a review, now “well under way”, launched by the Financial Conduct Authority, working with the Treasury and the Bank of England’s Prudential Regulation Authority, into the compensation scheme’s funding.
In particular, the review will examine whether to increase the compensation limit on certain financial products. Deposit protection is at present limited to £75,000 per person, and investments at £50,000. A consultation will be published in November with new rules expected to be ready by next summer, according to Andrew Bailey, the FCA’s chief executive.
“This could involve increasing limits on compensation in certain areas, in order to better protect consumers that manage their pension accumulation or, in particular, decumulation outside of traditional life insurance products,” wrote Mr Bailey in a letter to Andrew Tyrie, who chairs the Commons Treasury committee. Mr Tyrie revealed the review’s existence by publishing the correspondence.
The proposal to introduce higher limits for pension products come after the former chancellor, George Osborne, introduced pension freedoms in 2014, enabling people to draw down from their retirement funds. So far £7.65bn has been withdrawn. This has prompted the FCA to warn that pensioners could be subject to a variety of scams.
The Financial Services Compensation Scheme is funded through a levy — this year set at £337m — on financial companies overseen by the FCA and its fellow watchdog, the PRA.
Financial institutions could also see their contributions calibrated as a result of the review, according to how many complaints they receive or how risky the products they sell are deemed to be, according to Mr Bailey’s letter. That has the support of some firms, who argue that equal distribution of the levy means the good are bailing out the bad. John Griffith-Jones, the FCA’s chairman, this year floated the introduction of a “polluter pays” model, whereby groups that did not trigger compensation claims could ask for a discount.
“There has been talk of reviewing the FSCS levy since 2001 so this is not before time,” said Mr Tyrie. “I’m glad that the funding review is well under way, and that the scope of the review includes issues raised by the committee, such as the unpredictable nature of the levy.”
The letter did not give details of whether the upper limit on bank deposits, at present set at £75,000 per person, would be reviewed. The PRA rather than the FCA determines rules for bank and insurance compensation, while the FCA governs rules for other products.
EU rules stipulate that bank deposits up to €100,000 should be guaranteed. Last year, the PRA — then headed by Mr Bailey — decided that a strong pound meant the upper limit in the UK should be reduced from £85,000 to £75,000, a decision criticised at the time by Mr Tyrie.
Since the Brexit vote in June the pound has plunged in value. It is currently worth €1.11.