gressives might argue that
the state has a duty to protect
those citizens who are
financially unsophisticated
and/or economically disadvantaged.
As usual with
these sort of things, the
optimum approach is
somewhere in between.
The UK uses the FSCS
as a ‘compensator of last
resort’. It is important to
realise that all other avenues
of compensation must
be exhausted before the
FSCS will compensate.
Also, the level of compensation
depends on the
nature of the investment –
and in this case a deposit
must be distinguished from
an investment.
The deposit could be
with a bank, building society
or credit union. This
includes European Economic
Area (EEA) branches
of UKauthorised banks,
EEA banks who have
joined the UK scheme (and
paid the levy) in respect of
deposits taken by UK
branches, UK branches of
nonEEA banks and UK
building societies.
Credit unions in
Northern Ireland are not
covered but depositors are
protected by Northern
Ireland legislation. Deposittakers
in the Channel
Islands and Isle of Man are
not covered by FSCS.
l Eligibility
For an investment claim to
be eligible to receive compensation
from FSCS, it
must meet all of the following
criteria:
(a) the advice to make an
investment must have
been given on or after
28 Aug, 1988;
(b) the firm that provided
the advice must have
been authorised by the
appropriate regulator
to do so at that time;
(c) the investor must have
The legal approach l Does it work?
The traditional legal approach to compensation has the following
structure:
(a) A and B have a legal relationship (e.g. a contractual relationship)
(b) A does (or fails to do) something which causes B a loss
(c) B’s loss is due solely to A’s action (or failure)
(d) the action (or failure) is not the action of a reasonable person
(e.g. a failure to take reasonable care)
In such a situation, we would expect A to have a legal obligation to
compensate B to the extent of his loss. But there are two practical
problems with this approach in the financial services arena and in
particular the Icelandic bank scenario; it could take considerable
time, effort and cost to establish criteria (c) and (d), and, much more
fundamentally, A does not have the wherewithal to pay compensation.
lost money as a result
of the advice given;
and
(d) the firm (or its principals)
no longer has sufficient
assets to meet
compensation claims.
The term insurance contracts
includes pensions,
annuities, general insurance
contracts, endowments,
protection and
investment policies. Policyholders
may be protected
in the case of contracts
issued in the EEA, Isle of
Man, Channel Islands or
Gibraltar where the issuing
company is authorised in
the UK.
l Question of advice
There is a fundamental difference
between a deposit
and an investment in terms
of the scheme. To get compensation
in respect of a
deposit, ‘all’ that must
happen is that the deposittaker
fails. But to get
compensation in respect
of an investment, the claimant
must demonstrate a
loss as a consequence of
advice given.
The case of the Belfast
based Presbyterian Mutual
Society (PMS) currently hitting
the headlines, in
Northern Ireland at least,
may throw some light on
this distinction. Depositors
in PMS are being told that
they are in law investors
and that as no advice was
given, no compensation is
due. The Northern Ireland
and UK governments are
holding an enquiry into
PMS. Will this convince
those who believe that
they deposited money with
the society and received
interest that they were in
fact investors?
The FSCS is funded by
levies on authorised firms
and it is reasonable to
assume that the cost of the
levies is passed back to the
investor (at least in part) in
increased fees and charges.
So we all pay for it?
cUrrenT compensaTion limiTs
n Deposits: £50,000 per person per institutional group
n Investments: £48,000 per person (i.e. 100% of the first £30,000
and 90% of the next £20,000)
n Long-term insurance (e.g. pensions and life assurance): unlimited
(100% of the first £2,000 plus 90% of the remainder of the claim)
These tie in with the ambition of the scheme to compensate
the financially ‘weak’ – the wealthier the depositor, investor or
policyholder, the less the compensation receivable as a proportion
of ‘involved’ wealth.
Technical Briefing compensaTion
It must be appreciated
that the FSCS aims to
provide limited redress
where all other avenues for
compensatory relief have
been closed due to insolvency.
Within those strict
parameters it must be
judged a success. But advisers
and clients should be
aware that it is only a safety
net and investment strategies
such as diversification
and insurance can be more
practical in preventing irrecoverable
losses for wealthier
segments of society.
l Avoiding disaster
What can life offices do
to prevent another Kaupthing
Singer Friedlander
(KSF)? The selection of
funds for inclusion in a
portfolio bond is a matter
for the client and their professional
adviser. Life offices
do not, and should not,
get involved in that process.
But life offices should
ensure that details of the
consequences of the failure
of an underpinning
fund are included in the
product literature.
Some offices already
adopt this approach; but
the KSF issue showed that
others did not.
Life offices can, and do,
promote the benefits of
asset allocation and this
should continue with perhaps
even more vigour –
KSF would make a compelling
case study.
Finally, all sides of the
industry must remember
that many private individuals
have lost a considerable
amount through investment
in KSF both directly and
indirectly. At the risk of
being bombarded with
comments based on “closing
the stable door…” we
really must ensure that it
does not happen again.
Gerry Brown, head of trusts and
taxation, Prudential
“
Advisers and
clients should be
aware [the FSCS] is
only a safety net and
investment strategies
such as diversification
and insurance can
be of more practical
use in preventing
irrecoverable losses
for the wealthier
segments of society
”
AuguST 2009 [www.international-adviser.com] INTERNATIONAL ADVISER 35
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