Rebecca Tomes talks to Prakash Chandramohan, Strategy Director at The Investing and Saving Alliance (TISA) about the FCA’s proposed changes to the Financial Services Compensation Scheme (FSCS). In this Q&A, Prakash discusses the significant advice gap that both the FCA and the industry are trying to address, as well as TISA’s recommendations for how the FSCS can be made fairer, without weakening the framework for consumers.
RT: Could you briefly introduce yourself to our readers?
PC: I am the Strategy Director for The Investing and Saving Alliance (TISA). I have been with TISA for a couple of years now – but prior to this role, I worked for the wealth manager Quilter for eight years.
RT: Can you tell us what’s been happening with TISA in regards to the Financial Services Compensation Scheme?
PC: At TISA, we focus on ways to improve the financial wellbeing of consumers, particularly in the Investments, Savings and Pensions landscape. One of our main priorities involves addressing the needs of the UK’s advice gap and trying to come up with policy proposals and measures that will help the unadvised. So, when I was first looking at the FCA’s Discussion Paper on its Compensation framework review, my initial lens was: “I really wouldn’t want to see any changes to the framework that would weaken the FSCS for consumers”.
The Financial Services Compensation Scheme is clearly not working for the industry, and there are two key reasons for this:
- The levies are too expensive
- The ‘good’ firms are paying for the faults of ‘bad’ firms
Although something clearly has to give, we do not want that “give” to compromise the framework for consumers – particularly the unadvised consumers who suffer low confidence levels in how to invest. We need more unadvised consumers in the UK to take up advice and take up investment products, so we need measures like the FSCS to improve their confidence levels.
RT: What outcomes would you like to see in terms of addressing the problems associated with the FSCS?
PC: When I looked at the Discussion Paper, I felt that although it clearly articulated the problem of high FSCS costs, it did not solve any of the root cause issues. And that root cause issue is that bad actors and sources of consumer harm are not being identified early enough. Therefore, what TISA would like to see is more emphasis from the FCA on addressing the root cause issue.
One of our top recommendations is for the FCA to explore with industry how they can better support the FCA in identifying ‘bad actors’ and sources of consumer harm. Ultimately, the industry will be most knowledgeable on what practices are occurring in the marketplace. Any steps that enable the industry to help the FCA supervise would be extremely beneficial.
To make the FSCS more equitable, we have recommended that the FCA be given the power to require firms to hold their regulatory capital on deposit after the winding up of a firm, say for five years. Typically, FSCS pay-outs are required four years after a harm has happened. So, imagine that before a firm closes down, they have to hold that regulatory capital for five years. That would mean before the FSCS is asked to pay in, the firm’s regulatory capital would be used. I believe that would make it a lot fairer.