FSA proposes FSCS compensation rules shake-up

The FSA wants to give the Financial Services Compensation Scheme (FSCS) the power to pay full compensation earlier and without investigating whether a claim is vaild as part of a shake-up of the rules that govern the FSCS.

The regulator has today published a consultation paper on changes to the compensation sourcebook. This is separate to the planned consultation to review the FSCS funding model which is expected before the end of June.

The Financial Services Authority (FSA) has set out planned rule changes in a bid to enable the FSCS to handle claims quicker and more efficiently.

It proposes to allow the FSCS to pay full compensation earlier in cases where claimants are having to wait years before receiving full compensation.

Under the proposals where the FSCS has difficulty in establishing the underlying value of the investment, the FSCS must first decide whether it would be appropriate to pay a lesser sum in final settlement or make a payment on account. For payments on account the FSCS seeks an assignment of investors’ rights to pursue third parties to recoup compensation paid.

The FSA also wants to allow directors and managers of the firm in default to be eligible for compensation. Currently when assessing claims the FSCS has to screen individual claims for claims from directors. The FSA argues that by making directors eligible to claim, the process will be speeded up.

Directors and managers would be subject to court action regarding any liability they may have for the firm’s failure.

The regulator is also calling for the FSCS to pay out in cases where the cost to the FSCS of asssessing the claim exceeds the compensation due.

The FSA says: “We believe the proportionate approach is to give the FSCS the ability to pay compensation without investigating the eligibility of the claim and/or the validity and/or the amount of the claim if the costs of investigation are disproportionate to the benefits. The FSCS would also need to be satisfied that this was reasonably in the interests of firms.”

The FSA says this rule should aply to defaults occuring before and after the rule change takes effect.

The regulator says they proposals will not result in incremental costs for the FSA, with minimum cost increases for the FSCS.

However it says the extension of eligibility criteria to directors will hit compensation costs.

It says: “Given this proposal will increase the number of claimants eligible for compensation if a firm fails, it will increase compensation costs. In effect this increase in compensation costs is a transfer from levy payers to the customers of the failed firm. Over time, the firms that pay the levies may pass them on to their customers, for example via higher charges.”

Compensation costs may also be pushed up by giving the FSCS the option pay compensation without investigating the claim fully, if the FSCS pays claims that are not eligible or higher compensation than if it had fully assessed the claim.

But the FSA says: “We expect the probability of such an event occurring is very low, as the FSCS will have to investigate to a reasonable level that the costs of investigating the claim are disproportionate to the benefits and also that this is reasonably in the interests of fims, rather than checking cases individually.”