FSA publishes consultative papers on Consumer Complaints and Consumer Compensation

United Kingdom
Consumer compensation

The objective of compensation

The Government is concerned that investors are not generally in a position to make an informed assessment of the risk that the firm, to which they are about to entrust funds, may fail. This is not a new position, but the proposal that there be a single scheme to cover such losses is new and will require some reorganisation. The intention is to strike a balance between "caveat emptor" and consumer protection as overall objectives for the FSA, and the new compensation arrangements are intended to reflect this.

The argument for change

As with consumer complaints, the Government is concerned that there is a "patchwork quilt" of compensation schemes which is confusing to investors and may not afford them the quality of protection which they deserve. Although the existing schemes have operated successfully, the growing diversification of business has made it difficult to "pigeon-hole" any one organisation into a particular compensation sector. The FSA therefore intends to oversee the introduction of a single compensation scheme. It is proposed that the scheme covers all FSA authorised firms, even when a firm acts outside any specific permission given by the FSA.


A general objective of compensation arrangements is for them to be focused on "consumers who are least able to sustain financial loss". It is therefore intended that "professional" consumers (such as banks, investment firms etc.) would be excluded from cover. It is intended that cover is available for small businesses, who can be just as vulnerable as individual consumers. It is proposed to exclude, as permitted by the Deposit Guarantee Directive and the Investor Compensation Directive, firms which do not meet two out of the following three criteria:

  • A balance sheet total below ECU 2.5 million

  • A turnover below ECU 5 billion

  • Fewer than 50 employees.

Limits on compensation payments

The level of compensation payment available is one of the major differences between the schemes which currently exist. The Government proposes a full review of the different limits which currently exist to see whether harmonisation is possible and whether changes in the current levels are appropriate (for example, £18,000 for deposit protection and £48,000 for the investment sector).


It is proposed that there be no general limit on the amount which the fund could pay out (although individual limits on claims would continue). The FSA proposes to fund compensation schemes on a "pay as you go" basis, although it can see arguments in favour of building up a "buffer" of funds. Indeed, a standing fund may be created behind a "pay as you go" overall system. It is intended that all firms will pay towards the general running costs of the scheme, with the actual compensation cost to be paid for within individual sectors.