Following a review of the feedback received, the Financial Conduct Authority (FCA) has announced the next steps to improve its Financial Services Compensation Scheme (FSCS) amid growing concerns about increased costs.

Financial services firms regulated in the UK are required to pay fees to the FSCS, which will guarantee compensation if any authorised member of the industry becomes insolvent or is unable to meet customer claims. The compensation scheme is designed to provide additional protection and confidence for retail investors.

However, local financial service providers have reported growing concern that liability could act as a barrier to new firms looking to enter the market, as well as smaller firms that may struggle to maintain their business, and that it could reduce the supply of some financial services in the UK.

Sheldon Mills, executive director of Consumer and Competition at the FCA, said: "We welcome constructive engagement and feedback which will inform the next phase of this work. We want to ensure that the costs to industry of providing vital consumer protection through the FSCS are distributed in a fair and sustainable way - the polluter pays." We will continue to take decisive action to prevent harm from happening in the first place, which should help reduce levies over time."

The FCA began a review of the compensation framework in December 2021 and will accept comments from interested parties until March 2022. On December 14, 2022, the regulator issued a feedback statement highlighting the need to improve the behaviour of regulated firms in order to reduce FSCS calls.

Three main objectives for the next phase of the review

According to a recent FCA statement, the regulator has already taken action to address the current concerns. In line with its investment strategy, the FCA is taking a more rigorous approach to preventing potentially harmful firms from entering the market. The agency also imposed twice as many restrictions on firms to block the sale of the riskiest financial products.

After reviewing and addressing industry feedback, the FCA's next stage of the FSCS review will analyse compensation limits and consider whether their level is appropriate for particular types of claims.

In addition, the regulator wants to survey companies and consumers to raise awareness of the impact of compensation schemes on investment decisions and trader confidence. In the third step, the FCA will analyze the funding category thresholds to check whether they are maintained at an appropriate level.