Investors risk losing millions in plans to weaken financial safety net
Investors could end up with millions of pounds out of pocket in proposals that leave them without crucial protection from rogue advisers.
The plans set out by the city’s watchdog, the Financial Conduct Authority, yesterday meant that investors caught up in some of the biggest financial scandals of recent times would not have been eligible for Financial Services Compensation Scheme protection.
The program acts as a lifeboat for consumers when a business goes bankrupt or investors are mishandled by advisors. However, his spiraling compensation bill, which is ultimately funded by a levy on the financial services industry, has come under increased scrutiny in recent years.
The financial regulator has pledged to remedy the problem and, as such, is debating reducing the scope of the compensation scheme’s protection, with potentially ruinous results for victims of questionable investment advice.
Anyone with a claim against a bankrupt financial advisory firm would no longer be able to claim compensation, under the plans launched by the FCA, and some high-risk investments could also be excluded.
The regulator put forward the idea while admitting that consumers suffered “real and considerable harm” because of poor investment advice. The total compensation bill to be funded by the consulting industry in the current financial year is Â£ 330million and has been inflated by a series of high-profile scandals.
Investors who lost their lives in the collapse of London Capital & Finance, a collapsed ‘mini-bond’ firm, in 2019 were able to recover millions from the FSCS.
Many of these savers were able to do so even though the company sold unregulated investments, which are generally not covered by the bailout program. Indeed, they complained about the misleading advice given by LCF.
But such claims would no longer be successful if investment advice were excluded from the compensation rules. Likewise, victims implicated in the British Steel Pension Scheme scandal, which saw thousands of steelworkers falsely sentenced to wire their ‘gold-plated’ pensions, have also reportedly lost millions of pounds.
The FCA said: âOur current view is that such a reduction in the scope of FSCS protection could potentially have an impact on the level of confidence consumers have in financial services or may influence the decisions that consumers have in financial services. consumers take on the way they deal with licensed businesses in the future. “
The regulator has also suggested excluding wealthy or “sophisticated” investors from the compensation regime on the grounds that this demographic have the funds to absorb losses on their own and have a better understanding of the risks associated with their investment.
The FCA is currently considering controversial changes to its own rules about how much it pays to those who have lost money due to its own regulatory failures.
The proposals first presented by the Watchdog last year would see the maximum compensation amount capped at Â£ 1,000 for clients who experience hardship and inconvenience due to FCA errors and limited to Â£ 10,000 for financial losses.