advisor-client meeting

Driven by a history of mis-selling and misconduct in the investment industry, regulators in the U.K. are looking to shore up the country’s system for compensating harmed consumers.

The Financial Conduct Authority (FCA) launched a review of its financial services compensation scheme (FSCS), which serves as a backstop for consumers when regulated firms can’t pay financial claims against them from consumers stemming from misconduct.

The annual charges to the industry to fund the scheme have ballooned from £277 million in 2011-2012 to £717 million this year, the report noted.

“Many of the claims driving these costs relate to historic misconduct by firms in the investment sector, including financial advisers and [pension] operators, which have subsequently failed,” it said. “This pipeline of historic claims is expected to result in further FSCS payouts over the coming years.”

As a result, the FCA is now reviewing the scheme and “seeking views on fundamental questions about the purpose, scope and funding” of the framework.

The FCA said that it’s also committed to stabilizing the annual costs of the scheme — both by stepping up efforts to enhance the industry’s treatment of clients, and boosting the ability of firms to pay their own client compensation costs with new prudential rules that take effect in January 2022.

“The regulator is taking assertive action to address the root causes of the increase in compensation liabilities by improving the conduct of firms to prevent harm from happening in the first place,” it said.

“The FCA is also improving the financial resilience of firms so they are better able to meet their own redress liabilities and put things right for consumers,” it added

“We want consumers to have trust in a thriving UK financial services sector, and businesses to be confident that they can bring new and innovative products to market. To achieve this, it is vital that consumers have an appropriate level of protection if things go wrong — and that we find a fair and sustainable way of funding the cost of this protection,” said Sheldon Mills, executive director for consumers and competition at the FCA, in a release.

“Now is the time to ask how we can ensure our compensation framework is fit for the future.”

In Canada, while there’s no comparable compensation regime, the industry’s dispute resolution service — the Ombudsman for Banking Services and Investments (OBSI) — is undergoing its own review.

Osgoode Hall Law School professor Poonam Puri is leading the separate reviews of OBSI’s investment and banking mandates, which are now expected to be completed by late March. The deadline for responses to those consultations has been pushed back to Jan. 31 from an initial deadline of Dec. 2.