On 14 December 2022, the FCA published Feedback Statement 22/5: Compensation framework review: response to feedback and next steps (FS22/5).

FS22/5 follows FCA Discussion Paper 21/5 which was published last December seeking views from stakeholders as part of a review of the compensation framework within which the Financial Services Compensation Scheme (FSCS) operates.

The compensation framework review was launched following concerns about the increasing cost of compensation liabilities falling to the FSCS, which could create a barrier to firms entering or wishing to stay in the market, potentially affecting the availability of some financial services. The review aims to make sure the compensation framework continues to provide an appropriate level of consumer protection, with costs to industry distributed in a fair and sustainable way supporting innovation and growth.

In FS22/5 the FCA reports that stakeholders felt that the most effective way to bring down the cost of claims falling to the FSCS was for firms to improve their conduct to minimise the liabilities in the first place and to be more financially resilient. There was no clear appetite to bring the costs down in other ways such as removing aspects of consumer protection provided by the FSCS. It was acknowledged that this would merely shift the burden of the costs to the consumer, who would be unprotected if a firm failed.

The FCA also sets out in FS22/5:

  • How it is already taking forward its strategy to tackle the underlying causes of FSCS redress liabilities.
  • Its plans to ensure that FSCS compensation costs continue to be allocated amongst firms in a fair and sustainable way.
  • Its plans to review compensation limits in 2023.
  • That over the medium term the regulator wants to consider the appropriate scope of protection for both sectors it currently regulates, particularly investments and also new sectors that it may regulate in the future.

For the next phase of the review, the FCA is planning to:

  • Review compensation limits to consider whether they remain at an appropriate level for different types of claims.
  • Review funding class thresholds to consider whether the class thresholds remain at an appropriate level.
  • Carry out consumer and firm research, in conjunction with the FSCS, to improve the FCA’s understanding of the impact of FSCS protection on consumer decision making, confidence and behaviour, and on firm behaviour and incentives.

The FCA will progress the key actions set out in FS22/5 over the next year. The FCA expects to consult on any proposed changes to the compensation rules during 2023/24 with a view to confirming any changes by the end of that financial year.