This week's article completes my look at the subject of complaints and compensation that has been running in this column over the past two weeks. In the first week, consideration was given to the Financial Ombudsman Service while last week's article focussed on the Mortgage Code Arbitration Scheme and complaints relating to pensions. This week the focus is on compensation arrangements for customers who have lost money through the insolvency of an authorised firm. Since December 1 2001, these arrangements have been co-ordinated under a single scheme – the Financial Services Compensation Scheme – which in effect consists of a number of sub-schemes relating to different types of organisations. It should be noted that the FSCS provides compensation for losses sustained only as the result of the insolvency of a firm authorised by the FSA.
In the event of the default of an insurance company, compensation is payable in full if the insurance is compulsory by law. The most obvious example of this would be third party motor insurance. In the case of non-compulsory insurance such as buildings and contents insurance, the first £2,000 of a claim or policy is protected in full. For amounts above this threshold, 90% of the remainder of the claim or value of unused premiums will be met. For long-term insurance such as pension plans and life assurance the first £2,000 of a claim is protected in full. In addition the FSCS covers payment up to 90% of the value of a policy in liquidation. The FSCS replaced the Policyholders' Protection Board which existed immediately prior to December 1 2001.
In the event of a loss due to the insolvency of an authorised firm that is carrying out investment business regulated under the Financial Services and Markets Act 2000, the compensation payable is 100% of the first £30,000 of the loss plus 90% of the next £20,000. This places a limit of £48,000 on the compensation payable. It is important that candidates not only remember these figures but also are able to carry out simple calculations based on them. Try this question:
'Mary lost £40,000 as the result of the insolvency of an authorised investment firm. She has applied to the FSCS for compensation for her loss. How much compensation would be payable to her?' The answer is 100% of the first £30,000 plus 90% of the remaining £10,000 giving a total of £39,000.
Now try answering this second question: 'John lost £70,000 as the result of the insolvency of an authorised investment firm. He has applied to the FSCS for compensation for his loss. How much compensation would be payable to him?' The answer is, of course, £48,000 because compensation is limited to 100% of the first £30,000 of a loss plus 90% of the next £20,000.
Where a customer suffers a loss due to the default of a bank or building society the FSCS provides for compensation of 100% of the first £2,000 of the loss plus 90% of the next £33,000. This gives a maximum compensation amount of £31,700.
Try answering this question: 'James lost £20,000 in his savings account with the ABC building society as a result of the insolvency of the society. He has applied to the FSCS for compensation for his loss. How much compensation would be payable to him?' The answer is that James would receive compensation amounting to 100% of the first £2,000 plus 90% of the next £18,000, giving a total of £18,200.
Now have a go at this question: 'Jane lost £50,000 as the result of the insolvency of the XYZ building society. She has applied to the FSCS for compensation for her loss. How much compensation would be payable to her?' The answer is £31,700 because compensation is limited to 100% of the first £2,000 of a loss plus 90% of the next £33,000.
The FSCS is funded by a levy on authorised firms. Claims cannot be made against the FSCS for other losses such as those due to negligence, poor advice or a fall in stock market values. In some cases however, the customer may be able to seek compensation through the civil courts.
Students preparing for CeMAP paper one should ensure they are familiar with the whole subject of complaints and compensation as questions based on it are likely to be encountered in the examination.
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