Financial compensation scheme announces £100m fee increase for UK life and pension advisers

Out-Law News | 06 May 2015 | 11:11 am | 2 min. read

The UK's Financial Services Compensation Scheme (FSCS) is anticipating a further increase in claims related to self-invested personal pensions (SIPPs) this year, and has increased the levy it will charge authorised firms by £32 million to cover some of those costs, it has announced.

Over £100m of the final £319m levy will be payable by life and pension advisers, up by 75% from the £57m predicted by FSCS in its January budget and business plan for the year. Investment advisers will pay a combined £116m, less than the amount indicated in the January budget, while general insurance advisers will not be expected to pay any levy at all due to the "continued decline" of claims relating to payment protection insurance (PPI).

However, the FSCS warned that the total compensation paid out in relation to SIPPs could ultimately go over that £100m, with knock-on implications for retail life and pensions firms due to the way in which the compensation fund is funded and structured.

The FSCS is the UK's statutory compensation scheme for customers of authorised financial services firms. It is able to pay compensation to customers if a firm goes out of business or is otherwise unable to pay claims made against it. The scheme is funded by contributions from over 16,000 participating firms, which are split into 'funding classes' according to the type of business that they carry out. The FSCS has paid out more than £26 billion to more than 4.5m people since it was set up in 2001.

A SIPP is a type of personal pension plan which allows individuals to choose how their savings are invested from the full range of investments approved by the government and tax authorities. Since January 2013, financial regulators have issued a number of warnings reflecting concerns that some SIPP customers were not fully aware of the risks of these products, particularly of investing assets in non-standard asset classes.

According to the latest issue of its 'Outlook' publication (15-page / 440KB PDF), the FSCS began to receive claims from retail consumers with "very limited investment experience" whose savings had been transferred to SIPPs in 2014.

"Attracted by the prospect of very high and sometimes unrealistic investment returns, consumers were encouraged by introducers to make selections from a range of alternative investment propositions to invest their SIPP funds," the FSCS said. "These included overseas timeshare property developments, forestry plantations (either in the Far East or Australia) from which fuel oil was to be derived using unproven technology, carbon credits, gold and South American farmland."

FSCS chief executive Mark Neale said that the scheme was now compensating investment losses in many SIPP-related cases, and was also seeing "higher volumes" of these claims.

"However, it is still early days in terms of volume and value of claims coming to us so it is possible that the costs during the year might be even higher," he said. "That means that we cannot rule out, at this stage, the possibility of the costs exceeding the maximum amount we can levy on life and pension intermediaries in any one year. That could lead to a levy on all firms in the retail pool. We will provide more information as the situation becomes clearer."

In February, the FSCS announced that it was to begin compensating customers who transferred their pension savings to a SIPP for investment losses, as well as for lost pension growth and charges. The rule change reflected the new position of both the FSCS and financial regulators that advisers were potentially legally liable for these losses as they could not "restrict their advice to the suitability of the SIPP without considering the suitability of the investments to be held within the SIPP".

The FSCS was forced to raise a £20m additional levy from life and pension firms on top of £33m charged as part of the main levy for financial year 2014/15.