The Financial Services Compensation Scheme (FSCS) is the UK’s statutory ‘fund of last resort’ for customers of authorised financial services firms. The FSCS provides compensation when certain authorised financial services firms are unable, or likely to be unable, to meet claims against them.

The FSCS’s operating costs and compensation payments are funded by levies on financial services firms. Increasing compensation costs seen in recent years have prompted questions about the fairness of FSCS levies and how the FSCS should be funded.

The FCA has published a discussion paper on possible changes to the basis of financial services compensation The discussion paper is the start of a discussion with stakeholders on the compensation framework and the purpose, scope and funding of the FSCS. The paper is intended to “identify opportunities to improve the aspects of the framework which the FCA is responsible for, to ensure the framework remains appropriate and proportionate in order to benefit all market participants.”

The paper describes the work the regulator is taking to address the root cause of high compensation liabilities such that the likelihood of claims ending up at the FSCS is reduced. It then goes on to pose the following questions:

• What regulated activities should be protected under the scope of the FSCS?
• Who should be eligible to claim compensation from the FSCS?
• What is an appropriate level of compensation to be paid to an individual claimant?

There has been widespread concern in financial firms that the FSCS funding model is unfair and unsustainable – essentially, good firms that remain in business paying for the compensation due to clients of firms that go bust! So, last, but certainly not least, and likely to be of most interest to firms is the chapter considers whether improvements be made to how the FSCS is funded?