The £50,000 compensation limit for negligent advice should be scrapped, according to Financial Services Compensation Scheme chief executive Mark Neale.
In a blog yesterday, Neale said that while instances of bad advice were “few and far between”, protection needed to be in line with retirement savings held in insurance products to give consumers more confidence in the system.
There is currently no limit to compensation available for retirement savings held in insurance products, allowing consumers to reclaim 100% of their losses if an insurer or provider goes bust.
However, if an advice firm enters administration, the lifeboat fund can only pay out a maximum of £50,000 to anyone mis-sold investments.
Neale says: “There is little logic to protecting retirement savings in insurance products without limit, but to restrict protection for mis-selling to £50,000. This is confusing for consumers and corrodes confidence.
“And it leaves consumers with retirement pots in excess of £50,000 in a quandary because it makes no sense to break the pot up for the purposes of seeking advice. An adviser needs to see the full picture.”
Neale adds: “I can see a sound case for harmonising retirement savings limits. This has the support of MPs with 60% supporting harmonisation according to our research.”
The way the FSCS is funded is currently under review, with a consultation paper due this Autumn. According to sources familiar with the review, options being discussed include capping fees for smaller firms, making providers contribute more and taking unregulated investments out of FSCS coverage.
Neale said that how negligent advice was protected should also feature in the review.
Neale says: “Instances of bad advice are few and far between, when they do occur they can have a devastating impact on retirement savings which take a lifetime to build up. We see that now with Sipp-related claims arising from advice to transfer retirement savings into a Sipp and then to invest in illiquid and risky assets.
“That’s why I believe it is right to take a fresh look at the level of FSCS protection for negligent advice – currently £50,000 – as part of the current FCA review of our funding.”