The Financial Conduct Authority (FCA) is considering changing the way consumer compensation limits are structured after some firms suggested insurance and investment limits should be aligned.
The FCA will look at whether it should increase the amount of compensation investment customers can claim from the Financial Services Compensation Scheme (FSCS), it said in a policy statement out on 25 April.
Currently, those who claim for an insurance policy from a failed insurer are eligible for 90% of compensation (100% for mandatory products such as car insurance), while investment claimants face a £50,000 limit.
Annuities are seen as long-term insurance contracts and as such qualify for 100% protection. However, advice on the products is classed as investment advice, subjecting the claimant to the £50,000 investment limit.
The FCA and Prudential Regulation Authority (PRA) do not differentiate between investment claims in connection with pension related-deposits, long-term insurance contracts or investments, and similar non-pensions-related activities.
For instance, a person who purchases an investment product is in the same position with regard to FSCS limits whether the investment product is held in an ISA, in a self-invested personal pension (SIPP), or a defined contribution occupational pension scheme.
The FCA said it wanted to look at the issue in the context of the pension reforms, which gave all direct contribution savers over the age of 55 freedom to purchase the products they want and meant many more were opting for investment-type products such as income drawdown.
The FSCS had already said in its annual report for 2014-15 it was keen to discuss increasing the current £50,000 protection limit placed on SIPP investors with both the FCA and PRA.
The FCA asked firms whether they thought compensation limits should reflect the objectives of the consumer in making the investments and therefore should be consistent on products bought for the purpose of pension accumulation or decumulation.
It said the vast majority of respondents (39 out of 43) agreed, although some were concerned this could lead to higher FSCS levies.
Respondents were less enthusiastic about increasing the compensation limit for investment products to be aligned with insurance, many citing cost to the industry as the main deterrent.
The regulator said it would look at the issue as part of the upcoming FSCS funding review due later this year.
It said: "In the context of the FSCS funding review, we will consider all of the responses received, along with outcomes from the FAMR and data on the types of
products being purchased by consumers following the introduction of the pension freedoms.
"This will allow us to form a view on the feasibility and affordability of any potential changes to the FSCS compensation limits, both overall and with regard to pension products. We will consult on any proposed changes to the FSCS funding regime later in 2016."
The FSCS funding review is a three-yearly piece of work looking at the way firms contribute to the cost of compensating consumers.
The recent Financial Advice Market Review recommended the regulator look at the merits of raising the FSCS levy based on product risk.
This article was originally published on the Professional Adviser website at www.professionaladviser.com/
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