The Financial Services Compensation Scheme (FSCS) is the UK’s statutory compensation scheme for customers of UK-authorised financial services firms. The FSCS can step in to pay compensation if a firm is unable, or likely to be unable, to pay claims against it. The rules of the FSCS are made by the Financial Conduct Authority (FCA) and contained in its handbook. The FSCS is funded by levies on firms authorised by the Prudential Regulation Authority (PRA) and the FCA.

The FSCS plays a vital role in UK retail financial services. It ensures that consumers can confidently participate in financial services, knowing that malpractice or fraudulent behaviour will not put their long-term savings and investments at risk, even if the firm in question stops trading. The existence of a compensation scheme that can meet its responsibilities is fundamental in ensuring that the UK can build a culture of saving and investment.

However, funding the FSCS levy represents a significant financial cost and barrier to growth for firms. This is because, by its nature, it is an uncontrolled cost and penalises well-run firms for the failures of others. PIMFA, therefore, continues to advocate for the principle of ‘polluter pays’ to help address the moral hazard that provides for well-run firms to fund the misdeeds of others.

In this regard, FCA fines should be increasingly used to subsidise the FSCS levy rather than being directed towards the Exchequer, which would represent a much fairer system and genuinely represent a polluter pays model. This is the fairest way to ensure consumers get the protection that they need whilst lifting a considerable burden on firms.