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

dunstonh

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.

And that is actually quite high by modern standards. 0.4%-0.5% is more typical for insured funds. I arranged an individual scheme earlier in the week with the total annual charge of 0.28% using insured funds. Cheaper than the published charge on their factsheets.

You shouldn't rely on the fund factsheet as an indication of the fund charge. That is effectively the maximum charge prior to any form of discount. There could be a tiered fund value size discount. A discount due to where you bought it from or any number of other reasons.

will_b

dunstonh wrote: »

And that is actually quite high by modern standards. 0.4%-0.5% is more typical for insured funds. I arranged an individual scheme earlier in the week with the total annual charge of 0.28% using insured funds. Cheaper than the published charge on their factsheets.

You shouldn't rely on the fund factsheet as an indication of the fund charge. That is effectively the maximum charge prior to any form of discount. There could be a tiered fund value size discount. A discount due to where you bought it from or any number of other reasons.

Right, thanks, so 0.825% would be quite high. Also from the research I've just been doing I am not sure the Standard Life pension is actually fully covered with the MyFolio fund I picked. I think it's protected against loss by Standard Life Assurance Limited (SLAL), or Standard Life Trustee Company (SLTC), but the MyFolio funds are actually managed by Standard Life Investments, a separate entity, and don't appear to be covered by the FSCS when wrapped by an SLAL pension.

Cobbling together a couple of bits from the numerous docs on the Standard Life website:

Standard_Life_Investor_Protection_PDF wrote:

Both SL Intl and SLAL offer different types of insured funds. Some offer investments in funds in our own directly managed insured funds whilst others invest in a fund provided by an external fund manager known as an external fund link (EFL).

Where the investment is made only in to Standard Life’s own directly managed insured funds, the structure is relatively straight forward. The investor purchases units in the insured fund(s) offered by the insurance company. If SLAL or SL Intl defaults the investor could claim compensation from the FSCS under the contract of insurance part of the scheme.

If the investment includes any investments into EFLs or a mix of EFLs and directly managed insured funds, then the situation needs to be considered if either SLAL or the external fund manager was to be in default.

If SLAL/SL Intl were unable to meet its claims, investors would be protected under the ‘Protected contract of insurance’ category. This provides cover at 100% of the value of the policy (including the value of any EFL funds) without limit.

However, there would be no claim for compensation under FSCS rules if the external fund manager was unable to meet its claims, as SLAL or SL Intl cannot make a claim on behalf of its policyholders due to the ‘large company’ rule.

Standard_Life_-_Understanding_Unit_Linked_Funds_PDF wrote:

Our unit‑linked funds include:

Standard Life funds (Internal funds)
These are unit‑linked funds where Standard Life is responsible for the investment decisions.

External fund links
External fund links (EFLs) are Standard Life unit‑linked funds which invest in a re-insured unit‑linked fund or a CIS which is not managed by Standard Life. EFLs include funds operated by Standard Life Investments and also funds managed outside the Standard Life group.

So I think this means the MyFolio funds, operated by Standard Life Investments, are "EFLs", and so, if Standard Life Investments were to fail in a spectacular display of fraud or incompetence that led to ringfencing failure, the FSCS would not compensate. It seems rather unlikely that Standard Life Assurance Limited would stand by while many of their pension customers lost all their money as a result of the failure of Standard Life Investments, but the complexity does rather make one want to run to a SIPP with a simpler structure.

Sorry to everyone for going rather off-topic with all this.

Audaxer

Malthusian wrote: »

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.

It wouldn't make me leave one of the big platforms, but it would give me more reassurance that I would be better compensated if the worse were to happen with my investments at one of the big platforms like HL, AJ Bell, Halifax SD etc., in that I would be compensated up to £85k rather than £50k.

I wouldn't have thought that fly-by-night platforms would be covered by the FSCS whatever the limit. If there is very little chance of the FSCS having to be used, I don't see what the problem is raising the limit from £50k to £85k as it would give more reassurance to investors who are unaware how safe their money is even although it should be ring-fenced.

grey_gym_sock

Malthusian wrote: »

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.

agree with this. i think there's a good case for keeping the deposit and investment compensation limits different from 1 another. (as it happens, i think the investment limit should be higher than the deposit limit, not lower.)

Malthusian wrote: »

The main cost of increasing the compensation limits is[...] moral hazard.

disagree with this. because the people responsible for maintaining safe custody of assets (top management in the relevant financial services companies) are not the same people who'd suffer if it all fell apart (investors, except those under the £50k limit).

would top management in practice face criminal penalties in the event of serious failures of custody arrangements under their oversight? if they'd be let off with a slap of the wrist, then there is moral hazard.

individual investors are in no position to assess the quality of safe custody systems. all they can really do is try to stick to the bigger, more established platforms. which is similar to what you suggest advisors should be doing for advised investors. that is all very well, but it doesn't eliminate the risk.

property and pensions are the 2 largest components of household wealth in the UK. providing people act in a reasonably prudent way, they wouldn't expect to arbitrarily lose most of the value of their house or pension.

with a house, being prudent would include always taking out buildings insurance, and using a professional conveyancer when buying (so that you don't end up with a defective title, or can sue the conveyancer if you do).

with a pension, does being prudent include not having a large SIPP, because of the low compensation limit? you could make a case for that.

but if SIPPs are that unsafe, why are they generally available, and regarded as a mainstream financial product? IMHO, they should either have a more sensible (higher) compensation limit, or not be available at all.

we don't (or shouldn't) allow unsafe food to be sold, and rely on savvy consumers only buying the safe, slightly more expensive food. the idea is to ban the unsafe things, and then then companies compete on price only within that constraint.

IMHO, a more sensible compensation limit for investments might be £250k, but perhaps with a higher limit of £500k specifically for SIPPs.

Audaxer

grey_gym_sock wrote: »

agree with this. i think there's a good case for keeping the deposit and investment compensation limits different from 1 another. (as it happens, i think the investment limit should be higher than the deposit limit, not lower.)



disagree with this. because the people responsible for maintaining safe custody of assets (top management in the relevant financial services companies) are not the same people who'd suffer if it all fell apart (investors, except those under the £50k limit).

would top management in practice face criminal penalties in the event of serious failures of custody arrangements under their oversight? if they'd be let off with a slap of the wrist, then there is moral hazard.

individual investors are in no position to assess the quality of safe custody systems. all they can really do is try to stick to the bigger, more established platforms. which is similar to what you suggest advisors should be doing for advised investors. that is all very well, but it doesn't eliminate the risk.

property and pensions are the 2 largest components of household wealth in the UK. providing people act in a reasonably prudent way, they wouldn't expect to arbitrarily lose most of the value of their house or pension.

with a house, being prudent would include always taking out buildings insurance, and using a professional conveyancer when buying (so that you don't end up with a defective title, or can sue the conveyancer if you do).

with a pension, does being prudent include not having a large SIPP, because of the low compensation limit? you could make a case for that.

but if SIPPs are that unsafe, why are they generally available, and regarded as a mainstream financial product? IMHO, they should either have a more sensible (higher) compensation limit, or not be available at all.

we don't (or shouldn't) allow unsafe food to be sold, and rely on savvy consumers only buying the safe, slightly more expensive food. the idea is to ban the unsafe things, and then then companies compete on price only within that constraint.

IMHO, a more sensible compensation limit for investments might be £250k, but perhaps with a higher limit of £500k specifically for SIPPs.

Good post. Totally agree.

jamei305

Consumers should take reliability of investment provider into account. Unlimited protection or even a higher protection level would mean people would be happier to put their money with flakey providers, increasing the chance of bailouts and the overall cost of the scheme.

will_b

I agree with grey gym sock too. In the previous stage of the CP17/36 consultation they were considering a compensation limit as high as £1 million. I was disappointed to see that in October 2017 they decided to go for a limit of only £85k instead, and so made my thoughts clear in the feedback form.

jamei305 wrote: »

Consumers should take reliability of investment provider into account. Unlimited protection or even a higher protection level would mean people would be happier to put their money with flakey providers, increasing the chance of bailouts and the overall cost of the scheme.

I don't think a consumer can assess the reliability of an investment provider with much accuracy. Sticking to big names doesn't guarantee security - that was made clear in the financial crisis. A good financial advisor should be able to do a better job than the average consumer, but it is still a game of probability.

As for flaky providers, well I don't think they should be FCA authorized in the first place.