FSCS calls for review of £85,000 compensation limit

In a paper published alongside its latest bi-annual outlook, the Financial Services Compensation Scheme (FSCS) is calling for a review of its £85,000 compensation limit for pension claims. The FSCS wants the limit to be closer to the Financial Ombudsman Service’s (FOS) limit, which rose to £375,000 on 1st April 2022.

The call to close the compensation gap comes alongside the news that the FSCS is reducing its levy for the 2022/23 financial year by £275 million. The FSCS said the failure of fewer self-invested personal pension (SIPP) firms and a reduction in complex pension claims meant it could take this step.

While the FSCS says the £85,000 limit remains appropriate for most regulated products and services it covers, it has concerns that it means many claimants will suffer a significant compensation shortfall should their case land with them.

Pension mis-selling and the FSCS

Pension mis-selling cases go to the FSCS when firms are no longer trading. A recent report from the National Audit Office highlighted the extent of the compensation shortfall in the British Steel Pension Scheme (BSPS) scandal.

In the paper, the FSCS wrote: “There is an important exception when it comes to pensions. In this specific area we believe that the FSCS compensation limit of £85,000 should be higher.

“We would like to see it reviewed, with a view to reducing the gap between FSCS’s limit and the amount that the Financial Ombudsman Service can tell a business to pay, which is £375,000 as of April 1, 2022.”

Since the FSCS became a single compensation scheme in 2001, claim limits for both savings deposits and investments have risen and become aligned. However, the FSCS pointed out that this isn’t necessarily appropriate for pension savers needing to make a claim.

The FSCS continued: “Although today both limits are equal, they did not start that way. The deposit limit rise between 2001 and today has out-paced inflation, whereas pension protection is broadly worth the same as it was in 2001.

“The limit for pensions and investments is now harmonised with deposits and most other FSCS limits, including products like debt management plans where losses are likely to be very small.”

FSCS calls for similar review mechanism to FOS

Following a 2018 consultation, the Financial Conduct Authority (FCA) said the FOS limit would adjust in line with inflation from 1st April 2020, which is what led to the FCA approving the April 2022 increase to £375,000.

The FSCS believes a similar mechanism should be introduced for its compensation limit, writing:  “In the 2018 consultation the FCA said that while the number of ‘high value’ complaints is relatively small, there was a risk of very significant financial harm to complainants if they did not receive the full amount of compensation the ombudsman service considers due.

“Complaints above the previous award limit typically involve insurance that protects consumers from a significant loss, advice on long‑term investments that provide an income in retirement, or the investments themselves. We believe the same is true for customers who have a claim with FSCS.”

These comments from the FSCS follow the publication of an FCA discussion paper in December 2021, which outlined various ideas for conducting a compensation framework review.

FSCS highlights impact of customers’ losses

The FSCS’s main bone of contention – as demonstrated by the BSPS scandal – is the level of uncompensated losses pension savers face compared to those who lose their deposits if a bank were to fail.

According to FT Adviser, Simon Wilson, head of resolution at the FSCS, said: “The differences between the types of failure FSCS deals with are stark when it comes to how well we feel we are putting people back on track, and a lot of that is down to our compensation limits. In recent years, most of the deposit failures we’ve seen have been credit unions.

“Very few of their customers were holding more than £85,000 in their accounts, and even if they had been, there is temporary high balance protection there to help in many cases.

“When we declare an IFA in default, we see claims where customers have lost hundreds of thousands of pounds, life changing sums of money that we simply can’t return due to the limits in place.”

Pension savers risk losing protections

Unfortunately, there is also an element of pension savers unwittingly leaving themselves open to losing protections. According to the FSCS, an analysis of around 1,200 pension claims brought against two large SIPP operators found that:

  • 71% of these claims involved an introducer that the FSCS believes to be unregulated
  • Only 18% involved a regulated introducer
  • In 11% of claims, it couldn’t identify the introducer

Jonathan Pallant, head of stakeholder and public affairs at the FSCS, said: “The ‘advice gap’ is something that worries me. Consumers who neglect or are not able to take regulated advice when making significant decisions about their finances, such as their pension, will likely end up with fewer protections and less chance of recovering any losses through compensation if something goes wrong.

“Coupled with low-levels of financial literacy in the UK, it feels like we should be doing more to look at how poor practice and ‘bad actors’ can be eliminated from the industry, and under-served groups can be helped to access the advice they need.”

Was your pension mis-sold?

If you were mis-sold a SIPP, final salary pension transfer, or any other pension product, you may be entitled to compensation.

Contact LawPlus now for a free, no-obligation review of your pension.


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