Just because you received advice from an FCA regulated firm, it doesn’t mean your overall loss is protected.
At Money and Me Solicitors, we specialise in helping clients seek compensation for mis-sold pension claims. Recently, we assisted a client, Mr W, in obtaining compensation for his losses.
Unfortunately, despite his overall loss amounting to £684,445.63, the compensation payable by the Financial Services Compensation Scheme (FSCS) limit was capped at £85,000.
This left Mr W with a staggering deficit of nearly £600,000.
Mr W’s case highlights an essential aspect of the UK financial system. Even when you receive advice from an FCA regulated firm, your overall losses may not be fully protected.
In this blog article, we will delve into the inner workings of the FSCS and the limitations they impose on compensation awards.
In order to provide a comprehensive understanding of how the compensation process works, we will also provide a detailed breakdown of the FSCS Calculation Summary using Mr W’s case as an example.
“Just because you received advice from an FCA regulated firm, it doesn’t mean that your overall loss might be protected.”
What is the Financial Services Compensation Scheme?
The FSCS is designed to safeguard customers of authorised and regulated financial services firms if those companies are unable to fulfil their financial obligations resulting from claims against them for unsuitable advice..
Clients of approved and regulated financial services businesses are protected by the FSCS in the event that such firms are unable to meet their financial commitments as a result of claims made against them for providing unsuitable advice.
It deals with a variety of claims, such as those involving deposits, investments, insurance plans, and pension transfers that were wrongly offered, among others.
Mis-sold pensions, in particular, refer to situations when people received unsuitable advice or incomplete information regarding the risks connected to their pension investments.
It is crucial to remember that the FSCS acts as a compensation fund of last resort, assisting clients when an approved financial services provider is unable to cover claims brought against them.
This might happen, for instance, if an IFA ceases to trade.
The FSCS Compensation Limit
While the FSCS provides essential protection for consumers, it is crucial to understand that a compensation cap is in place for pension & investment claims.
The restriction is currently set at £85,000 per regulated businesses, meaning that the most money a claimant may be compensated for an investment-related claim is restricted to this sum.
There may be more than one claim filed with the FSCS if more than one (regulated) firm participated in a transaction or transfer.
The FSCS compensation limit exists for several reasons
One of the main reasons is to protect the actual fund. Unlimited compensation pay-outs could eventually deplete its resources and prevent the compensation fund from existing altogether.
Furthermore, by offering limited guaranteed protection to financial losses, the FSCS hopes to sensibilise consumers in running their due diligence before making investment decisions.
The implications of the FSCS compensation cap for claimants can be significant, particularly in cases where their losses greatly exceed the capped amount.
As demonstrated in Mr W’s case, the cap applies regardless of the claimant’s actual losses.
Therefore, even if a claimant has suffered losses well above £85,000, they will still only be eligible for a maximum compensation of £85,000 from the FSCS.
“The implications of the FSCS compensation cap for claimants can be significant, particularly in cases where their losses greatly exceed the capped amount.”
FCA Regulated firms and the limitation of the protection associated with their advice.
All financial services companies, also referred to as regulated parties, are expected to comply with the rules set by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) to protect clients.
Nonetheless, FCA regulated firms’ advice does not always protect clients from losses.
There are various reasons why advice from regulated parties may still result in financial losses for consumers. In fact, even the most well-intentioned advisors can make mistakes, give negligent advice, or fail to comprehend your specific needs and circumstances fully.
Misrepresentation or a lack of transparency can also lead you to make wrongly informed investment decisions.
Needless to say that economic and market forces can also play a role in causing losses, as no investment is entirely risk-free.
“even the most well-intentioned advisors can make mistakes”
Mr W’s Case Study
In May 2018, Mr W was advised by a now-defunct Independent Financial Adviser (IFA) firm to transfer his Final Salary Pension Scheme into a Self-Invested Personal Pension Scheme to invest in SVS Securities.
The transfer value of his Final Salary Pension Scheme was £700,408.00, from which Mr W took his maximum (Tax-Free) Pension Commencement Lump Sum (PCLS) of £175,102.00.
After various deductions to cover fees, including the IFA’s fee of £7,350, the remaining fund of over £500,000 was invested in SVS Securities.
SVS Securities went into administration on 5th August 2019, less than 18 months after Mr W had invested with them.
Upon winning his first claim on 5th April 2023, we established that had Mr W remained in his Final Salary Pension Scheme, the hypothetical value of that Pension would have been £1,050,627.78.
The term ‘hypothetical value’ refers to the amount a Final Salary Pension Scheme would have required in cash assets to fund Mr W’s guaranteed, index-linked retirement income and benefits.
We also discovered that the overall remaining value of Mr W’s SVS Securities portfolio had dropped to £193,390.65, representing an investment loss of over 60%.
To calculate his overall loss, standard procedure is to deduct any benefits taken from, and the value of the Clients current pension scheme, from the ‘hypothetical’ value of his previous (defined benefit) pension scheme.
‘Hypothetical’ value is the equivalent cash value the Clients previous defined benefit pension would have required to fund his guaranteed retirement benefits.
According to the Financial Services Compensation Scheme (FSCS) Calculation Summary, Mr W’s total eligible loss was £684,445.63. However, due to the FSCS compensation cap, he could only receive £85,000, leaving him with a deficit of nearly £600,000.00.
Although we are confident in achieving further successful outcomes for our client, we will be hard-pressed to recover his full loss due to the way the redress system works and the (FSCS) limits applied.
Regrettably, Mr W’s case is not unique. Many IFAs and others involved in the pension transfer process collect substantial commissions and fees for poor advice, leaving the FSCS to cover only a fraction of clients’ losses.
Those responsible for these losses often shield themselves behind corporate structures, making it difficult for clients to hold them personally accountable. The mis-sold pensions scandal has had a far-reaching impact on individuals’ lives and financial security in retirement. Unlike the PPI scandal, where customers could recover their full losses from financial institutions, the limitations on FSCS recovery in pension cases have amplified the consequences for those affected.
Lessons Learned and Recommendations
Mr W’s case is a stark reminder of consumers’ potential risks and limitations when relying on advice from regulated parties and the FSCS compensation cap.
Despite receiving advice from a regulated IFA and obtaining compensation through the FSCS, Mr W was left with a significant deficit due to the compensation cap and the unforeseen failure of his investment.
To protect themselves from similar situations, consumers should consider the following recommendations:
Conduct thorough research: Before making any financial decision, take the time to research the financial products, services, and providers you are considering. Understand the potential risks and rewards associated with each option.
Seek second opinions: Don’t rely solely on one source of advice. Consult multiple financial professionals and gather various opinions to make a more informed decision.
Understand the risks: No investment is risk-free, and even advice from regulated parties may not guarantee complete loss protection. Be aware of the potential risks associated with your investments, and consider whether they align with your financial goals and risk tolerance.
FSCS compensation limit: Understand that because of this limitation, the FSCS compensation may not cover your total losses in case of a mis-sold pension.
Consult with experts: If you believe you have been mis-sold a pension or have suffered financial losses due to poor advice, reach out to experts like Money and Me Solicitors for assistance. We specialize in mis-sold pension claims and can help you navigate the complex process of seeking compensation.
By following these recommendations and staying informed about the potential risks and limitations of the financial services industry, you can make more informed decisions and better protect your financial interests.
In conclusion, consumers need to understand the FSCS compensation cap and the limitations of advice from regulated parties when making financial decisions.
As illustrated in Mr W’s case, significant financial losses can still occur even with the protection offered by the FSCS and advice from a regulated IFA.
If you believe you have been mis-sold a pension or have suffered financial losses due to poor advice, don’t hesitate to reach out to Money and Me Solicitors for help.