Nov 17 – The Compensation Contract

It is not often that I am heard to commit a “well done” to the FCA. However now is such a time based on their decision to re-consult on a new approach to funding the Financial Services Compensation Scheme. Rather than taking the soft option of picking one of the sub-optimal alternatives they had originally proposed, they have listened to the market and are now testing some other ideas, for which they should be applauded.

AMI was not convinced by their original consultation ideas and took the opportunity to meet with a number of our contacts within the FCA, at FSCS and at Treasury to discuss different solutions. The changes proposed provide the potential to move the claims linked to poor protection advice into an enlarged general insurance pot which has much more affinity. The real gain however is that it gives firms the options to remove their mortgage and protection advisers’ activity from the costs associated with poor advice in the more risky areas of pension and investment advice. This is more logical and fits better with many business models.

Mortgage intermediary firms will still be fully on the hook for mortgage based claims but it is to be hoped those such as the Fuel Investments based payments are nearing an end and that there are not others lurking just out of sight. There is a risk that in joining the General Insurance pool there will be a spike in costs based on PPI, but there are unlikely to be new firm failures linked to this and therefore Plevin claims are the only other significant driver. It is however a large pool in which mortgage firms’ turnover will be relatively diluted.

The most fundamental change in this paper is the proposal to ask product providers to contribute 25% of intermediary costs. This recognises that there should be some duty of care from the product manufacturers. They need to ensure that the product is being sold by an intermediary who they are comfortable is competent to advise on the complexity of their approach. That some in the industry, particularly the ABI think that is wrong is beyond my comprehension. Their view that PPI, pensions mis-selling and the endowment crisis was nothing to do with them is just plain wrong. It is essential that in our new technology based world that those who design and market products are very clear about who they allow to promote, advise on and sell them. It is essential that they take ownership of assessing the competence and ability of those they choose to do business with, as many mortgage lenders have done.

Some may feel that the increase in compensation limits is excessive. However I think it will be useful to have a single common number across all classes which will be easy for consumers to understand. There is a need to have a limit to ensure that consumers still feel they are taking some risk and are involved in ensuring that they make rational choices. It was also good to see in last week’s FCA work on their Future Approach to Consumers that there was recognition that they expect consumers to take reasonable responsibility for the decisions they make about the financial products and services they buy. Moving some responsibility away from firms and back to consumers is another big step forward.

Robert Sinclair