Watchdog proposes regular review of investment compensation cap

There should be no increase in the amount of money that customers can get back if their bank, building society or other investment company collapses, the City watchdog has said.

The Financial Conduct Authority said it believes the current £85,000 limit is enough to cover the vast majority of cases and does not need to change.

However it has suggested the level should perhaps be reviewed once every three years to ensure that it keeps pace and can be adjusted to account for inflation.

In a document released on Monday, the FCA said: “Generally, we consider the current levels, which were only recently changed, represent an appropriate level of consumer protection in that they are at an adequate level to cover a reasonable proportion of customers’ claims.”

It is consulting on potential changes to the way the Financial Services Compensation Scheme (FSCS) works.

The consultation follows a series of high-profile failures, some of which the scheme has not been able to fully compensate.

Government ministers were forced to step in after only a proportion of those whose savings were trapped by the collapse of London Capital and Finance (LCF) were told they would be compensated by the FSCS.

The FCA’s consultation largely suggests that the watchdog believes it needs to catch problematic investment firms before any collapse, rather than picking up the pieces afterwards.

But the FCA has so far struggled to contain this, and the FSCS has been forced to step in time and time again in recent years.

Over the past decade the total amount needed to run the FSCS, most of which has gone on payouts, has soared from £277 million to £717 million.

Most of this has been spent on what the regulator calls “historic misconduct … in the investment sector” by firms which have then gone bust.

“This pipeline of historic claims is expected to result in further FSCS payouts over the coming years,” the FCA said.

FCA consumers and competition boss Sheldon Mills said: “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. Now is the time to ask how we can ensure our compensation framework is fit for the future.

“We are already taking action against the drivers of compensation claims. These include our measures to reduce the impact when firms fail and to tackle misconduct in the investment market.”

The FCA has now opened a consultation on what to change in the scheme, and is asking for feedback by March.