Compensation costs for failed investment advice businesses are so high that a bail-out fund for consumers is set to be increased by 38%.
The Financial Services Compensation Scheme (FSCS) safeguards consumers for financial loss if a regulated firm is declared in default.
For a firm to go into default, the FSCS must see that the firm does not have the money to cover claims from customers.
Compensation is paid up to maximum limits – for instance £85,000 for cash on deposit and £50,000 on investments. The pay-out is per person per firm.
The compensation funded by a levy on financial firms. Last year, the FSCS called in £76 million from investment advisers, but this year wants £105 million.
Customers may pay more to cover levy
The increase is mainly from investment firms to cover expected claims from Catalyst Investment Group customers. The firm was censured by the Financial Conduct Authority (FCA) in October 2013 for selling risky bonds without telling potential investors about the downside of the investment.
Payments from insurance brokers have also been hiked by 7% to pay for claims from consumers related to the collapse of specialist credit brokers.
Brokers will have to find an extra £62 million for the fund, up £4 million from last year.
The total FSCS levy for the coming year is £313 million – that includes funding for all financial services firms and includes the investment advice sector.
The figures are proposed increases and subject to confirmation following a consultation in the financial services industry.
Many financial advisers are concerned about the rises and may pass the costs on to customers, said the FCA.
Warnings about bogus advisers
The FCA has also issued these warnings about bogus firms posing as regulated financial advisers:
- LGS Commerce Insurance
- Asia World Capital
- Ledbury Moore
- Alfred Weber Wealth Management
- OffShore Private Bank Plc / OffShore Private Scotland Plc
- The Prime Mortgage & Finance Limited
- Zelomit Insurance
- GlassRise Bank
- Chelsea Financial
Dealing with an unregulated firm
If you buy shares, save money or invest with an unregulated firm, you lose any protection offered by the Financial Ombudsman and the Financial Services Compensation Scheme. Broadly, you have no independent place to complain if the deal goes wrong and are unlikely to win any compensation.
Checking if a firm is regulated
Go to the Financial Services Register to check if a firm is regulated in the UK.
Reporting a suspected bogus adviser
Find out how to report unauthorised advisers on the FCA web site
