FCA CP17/36 - Increase to £50k Investment Compensation Limit

will_b

The FCA are consulting on increasing the compensation limit for investments from £50k to £85k. I think this is good, but it should be higher still to encourage the public to invest more, to demonstrate the FCA's faith in their rules and regulations relating to ringfencing and such, and, well, because it would be rather convenient for paranoid investors like me who worry about having too much invested in any single platform or fund.

The public has until 30th January to provide feedback on the FCA's CP17/36 consultation paper via their online form. As a new user I can't post a link to it, but you'll find it easily if you Google "CP17/36".

I tried as best I could to make a case for a higher compensation limit. If anyone else fancies trying to persuade them, now's the time.

Malthusian

I disagree. Unlike FSCS compensation for deposits, FSCS compensation for investments is hardly ever needed because - as you say - investments should be ring-fenced. I don't see what difference raising it to £85k will make.

If you have a six-figure portfolio you should be investing with a well-known established provider where the risk of fraud is minimal, and where if a fraud does take place, the parent company is big enough to make good the losses.

Increasing the limit to £85k isn't going to make those with portfolios just over £50k leave the likes of HL and Fidelity and head to fly-by-night smaller platforms, nor should it.

What equalising the deposit and investment compensation limits will do is to blur the line further between deposits and investments, which is something we really don't need more of.

I can see the Facebook ads now: "London Black Capital Finance Alternatively Secured Bonds 8% per annum - Now With £85k FSCS Compensation!* *your capital is at risk and FSCS compensation is almost totally irrelevant"

will_b

Malthusian wrote:

I disagree. Unlike FSCS compensation for deposits, FSCS compensation for investments is hardly ever needed because - as you say - investments should be ring-fenced. I don't see what difference raising it to £85k will make.

If you have a six-figure portfolio you should be investing with a well-known established provider where the risk of fraud is minimal, and where if a fraud does take place, the parent company is big enough to make good the losses.

Increasing the limit to £85k isn't going to make those with portfolios just over £50k leave the likes of HL and Fidelity and head to fly-by-night smaller platforms, nor should it.

I think perhaps the perception may be more important than the reality. Many people have the bulk of their investments in their pension. And for a decent retirement one needs a pretty big pension pot - certainly a lot bigger than £50k, or £85k in fact. The government wants to encourage people to invest for their retirements, but a natural concern (albeit perhaps imaginary) is that one's pension pot could disappear thanks to fraud or some sort of accidental data loss made by the platform or the trustee.

Personally I don't have a clear idea on the chances of that sort of event happening. I suspect the odds are low, and certainly I have read in numerous places that they are low, but I don't fully understand the ringfencing system and I know that no system is foolproof, and unexpected things happen sometimes. Plenty of people have similar concerns about putting too many eggs in one basket, however secure that basket is supposed to be.

If the ringfencing system works exactly as it is supposed to, then a higher compensation limit should never need to be used in the event of a HL or a Fidelty messing up. But, whether it is ever needed or not, I think having a higher limit increases peace of mind and encourages people to invest more, and both of those are good things.

ColdIron

will_b wrote: »

Many people have the bulk of their investments in their pension. And for a decent retirement one needs a pretty big pension pot - certainly a lot bigger than £50k, or £85k in fact. The government wants to encourage people to invest for their retirements, but a natural concern (albeit perhaps imaginary) is that one's pension pot could disappear thanks to fraud or some sort of accidental data loss made by the platform or the trustee.

The £50,000 protection has no relevance to many pensions

Pension Life Savings: If you are still building up your pension pot, 100% of your pot will be protected if it's directly managed under a life insurance contract. This would include personal pensions and stakeholder pensions, but not defined-benefit workplace pension schemes, which may be instead covered by the Pension Protection Fund.

https://www.fscs.org.uk/what-we-cover/products/pensions/compensation-limits-for-pensions-retirement-savings/

will_b

ColdIron wrote: »

The £50,000 protection has no relevance to many pensions

Pension Life Savings: If you are still building up your pension pot, 100% of your pot will be protected if it's directly managed under a life insurance contract. This would include personal pensions and stakeholder pensions, but not defined-benefit workplace pension schemes, which may be instead covered by the Pension Protection Fund.

Yes this is true. It is more of an issue (or perceived issue!) for SIPPs.

dunstonh

But SIPP providers pay less in regulatory costs than personal pensions. So, if you increase the FSCS protection, which is funded by levies on the providers, you then see the cost to consumers. Also, personal pensions/stakeholders have to carry out higher levels of due diligence and meet higher regulatory requirements. Again, greater costs.

So, do you want the increased protection at a cost?

will_b

dunstonh wrote: »

But SIPP providers pay less in regulatory costs than personal pensions. So, if you increase the FSCS protection, which is funded by levies on the providers, you then see the cost to consumers. Also, personal pensions/stakeholders have to carry out higher levels of due diligence and meet higher regulatory requirements. Again, greater costs.

So, do you want the increased protection at a cost?

Good point. Personally if I had a big SIPP I would be happy to pay more for the reassurance of FSCS protection on the full amount. A bit like how I am happy to insure my house against the unlikely event of a big fire. Peace of mind is worth something.

But are there perhaps two separate issues here:

1. The cost of the rules and regulations that aim to ensure that nothing goes wrong in the first place i.e. the cost of ringfencing and such.
2. The cost of covering the loss if/when the regulations fail.

The cost of the regulations is there already, isn't it? It's not like investments are only ringfenced up to £50k. I see the compensation limit as a guarantee that the rules and regulations (and the monitoring of their implementation) is good enough, which it should be. If the rules and regulations are already good enough to prevent loss, should there be significant costs in increasing the compensation limit to effectively guarantee that the rules and regulations are good enough to do what they are supposed to?

(Apologies if I am being naive - I don't have a good grasp of how all this works, as much as I try!)

Malthusian

will_b wrote: »

Good point. Personally if I had a big SIPP I would be happy to pay more for the reassurance of FSCS protection on the full amount. A bit like how I am happy to insure my house against the unlikely event of a big fire. Peace of mind is worth something.

Why not transfer the SIPP to an insurer personal pension or stakeholder then (even if it's more expensive)? I am guessing the answer isn't "because I am one of the five people who actually uses a SIPP to hold an individual commercial property".

The cost of the regulations is there already, isn't it? It's not like investments are only ringfenced up to £50k. I see the compensation limit as a guarantee that the rules and regulations (and the monitoring of their implementation) is good enough, which it should be.

You may as well say that if the rules and regulations were good enough, we wouldn't need any FSCS cover for investments as no-one would ever worry about their investments not being ringfenced.

No matter how good the regulations are, you can't be certain that someone, somewhere isn't breaking the client money rules. The FCA can't install a regulator to sit permanently in every investment company's office and check their cashflows on a day-to-day basis.

The main cost of increasing the compensation limits isn't in having to hire more FCA staff to make sure the rules are being followed, it's moral hazard. If you're a large adviser with lots of assets under advice to invest, why bother doing due diligence on a platform when if it turns out to be a fraud all your clients will be bailed out by those who went with more established providers? Why should platforms employ people in the back office to check the figures and make sure no-one is dipping into clients' accounts, when it doesn't matter because if there's a fraud the FSCS will pay out? And how can you justify charging clients for it when they don't get any benefit?

will_b

Malthusian wrote: »

Why not transfer the SIPP to an insurer personal pension or stakeholder then (even if it's more expensive)? I am guessing the answer isn't "because I am one of the five people who actually uses a SIPP to hold an individual commercial property".

No, no SIPP-held commercial property here

At the moment my pension actually is an insured personal pension with Standard Life. I want to move it to a fixed-fee platform like Interactive Investor to get access to a better range of funds and to reduce costs (ironic I know, given our discussion!).

Malthusian wrote: »

You may as well say that if the rules and regulations were good enough, we wouldn't need any FSCS cover for investments as no-one would ever worry about their investments not being ringfenced.

No matter how good the regulations are, you can't be certain that someone, somewhere isn't breaking the client money rules. The FCA can't install a regulator to sit permanently in every investment company's office and check their cashflows on a day-to-day basis.

The main cost of increasing the compensation limits isn't in having to hire more FCA staff to make sure the rules are being followed, it's moral hazard. If you're a large adviser with lots of assets under advice to invest, why bother doing due diligence on a platform when if it turns out to be a fraud all your clients will be bailed out by those who went with more established providers? Why should platforms employ people in the back office to check the figures and make sure no-one is dipping into clients' accounts, when it doesn't matter because if there's a fraud the FSCS will pay out? And how can you justify charging clients for it when they don't get any benefit?

Fair points, yes.

For what it's worth, I'm actually more concerned about the risk of an adminstrative or technical error than I am of large-scale fraud. Something going haywire and records of investments getting mixed up or destroyed, perhaps. That is just my speculation though. If/when something goes horribly wrong with a big SIPP provider, quite likely the underlying cause will be something I never would have thought of.

ColdIron

will_b wrote: »

At the moment my pension actually is an insured personal pension with Standard Life. I want to move it to a fixed-fee platform like Interactive Investor to get access to a better range of funds and to reduce costs (ironic I know, given our discussion!).

I would check the charges and benefits carefully before jumping. I believe workplace pensions have a maximum charge (0.75%?) and can attract discounts due to company size etc. My Standard Life Managed Pension fund was only 0.55%. I seem to remember there was a death in service feature as well

will_b

ColdIron wrote: »

I would check the charges and benefits carefully before jumping. I believe workplace pensions have a maximum charge (0.75%?) and can attract discounts due to company size etc. My Standard Life Managed Pension fund was only 0.55%. I seem to remember there was a death in service feature as well

Will do, thanks

I have everything in the Standard Life MyFolio Market V Pension Fund, which they are currently listing as having a total annual fund charge of 1.025%. I'm pretty sure that is about as low as their pension fund fees get. I get a 0.2% discount for having over £50k, which they apply by adding extra units every month, to bring it down to 0.825%, which is OKish but not great. I'm director of my own limited company (just me and my wife), so I don't have much negotiating power to get further discounts, but I might give it a go!

CORRECTION: You're quite right, their Managed pension funds have lower fees - 0.616% they are saying today, and that is before any discounts are applied.