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  • FIRST POST
    • will b
    • By will b 12th Jan 18, 2:39 PM
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    will b
    FCA CP17/36 - Increase to £50k Investment Compensation Limit
    • #1
    • 12th Jan 18, 2:39 PM
    FCA CP17/36 - Increase to £50k Investment Compensation Limit 12th Jan 18 at 2:39 PM
    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.
Page 1
    • Malthusian
    • By Malthusian 12th Jan 18, 3:20 PM
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    Malthusian
    • #2
    • 12th Jan 18, 3:20 PM
    • #2
    • 12th Jan 18, 3:20 PM
    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
    • By will b 12th Jan 18, 3:52 PM
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    will b
    • #3
    • 12th Jan 18, 3:52 PM
    • #3
    • 12th Jan 18, 3:52 PM
    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.
    by Malthusian
    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
    • By ColdIron 12th Jan 18, 4:04 PM
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    ColdIron
    • #4
    • 12th Jan 18, 4:04 PM
    • #4
    • 12th Jan 18, 4:04 PM
    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.
    Originally posted by will b
    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
    • By will b 12th Jan 18, 4:17 PM
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    will b
    • #5
    • 12th Jan 18, 4:17 PM
    • #5
    • 12th Jan 18, 4:17 PM
    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.
    Originally posted by ColdIron
    Yes this is true. It is more of an issue (or perceived issue!) for SIPPs.
    Last edited by will b; 12-01-2018 at 4:30 PM. Reason: Figuring out how to quote with a link... Got it now I think :)
    • dunstonh
    • By dunstonh 12th Jan 18, 4:47 PM
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    dunstonh
    • #6
    • 12th Jan 18, 4:47 PM
    • #6
    • 12th Jan 18, 4:47 PM
    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?
    I am an Independent Financial Adviser (IFA). Comments are for discussion purposes only. They are not financial advice. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
    • will b
    • By will b 12th Jan 18, 5:35 PM
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    will b
    • #7
    • 12th Jan 18, 5:35 PM
    • #7
    • 12th Jan 18, 5:35 PM
    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?
    Originally posted by dunstonh
    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
    • By Malthusian 12th Jan 18, 5:51 PM
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    Malthusian
    • #8
    • 12th Jan 18, 5:51 PM
    • #8
    • 12th Jan 18, 5:51 PM
    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.
    Originally posted by will b
    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
    • By will b 12th Jan 18, 6:18 PM
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    will b
    • #9
    • 12th Jan 18, 6:18 PM
    • #9
    • 12th Jan 18, 6:18 PM
    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".
    Originally posted by Malthusian
    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!).

    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?
    Originally posted by Malthusian
    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
    • By ColdIron 12th Jan 18, 6:35 PM
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    ColdIron
    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!).
    Originally posted by will b
    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
    • By will b 12th Jan 18, 7:00 PM
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    will b
    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
    Originally posted by ColdIron
    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.
    Last edited by will b; 12-01-2018 at 7:03 PM.
    • dunstonh
    • By dunstonh 12th Jan 18, 7:46 PM
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    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.
    I am an Independent Financial Adviser (IFA). Comments are for discussion purposes only. They are not financial advice. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
    • will b
    • By will b 12th Jan 18, 8:36 PM
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    will b
    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.
    Originally posted by dunstonh
    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:

    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 Lifeís 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 ĎProtected contract of insuranceí 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 Ďlarge companyí rule.
    by Standard Life Investor Protection PDF
    Our unit!!!8209;linked funds include:

    Standard Life funds (Internal funds)
    These are unit!!!8209;linked funds where Standard Life is responsible for the investment decisions.

    External fund links
    External fund links (EFLs) are Standard Life unit!!!8209;linked funds which invest in a re-insured unit!!!8209;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.
    by Standard Life - Understanding Unit Linked Funds PDF
    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
    • By Audaxer 12th Jan 18, 10:08 PM
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    Audaxer
    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.
    Originally posted by Malthusian
    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
    • By grey gym sock 13th Jan 18, 4:21 AM
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    grey gym sock
    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.
    Originally posted by Malthusian
    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.)

    The main cost of increasing the compensation limits is[...] moral hazard.
    Originally posted by Malthusian
    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
    • By Audaxer 13th Jan 18, 9:50 AM
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    Audaxer
    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.
    Originally posted by grey gym sock
    Good post. Totally agree.
    • jamei305
    • By jamei305 13th Jan 18, 10:31 AM
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    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
    • By will b 13th Jan 18, 11:18 AM
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    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.

    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.
    Originally posted by jamei305
    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.
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