The UK Regulatory Protection Regime
The UK Regulatory Protection Regime
The protection afforded to clients transacting financial products via a UK authorised and regulated Independent Financial Adviser like Gerard Associates Ltd is comprehensive but also complicated.
Great care needs to be taken when transacting offshore advice. Whilst you may resident abroad or considering living abroad, most other countries do not have anywhere near the same comprehensive regulatory controls. Many offshore products are promoted as ‘not being available in the UK’ – but the reasons are:
- Opaque and implicit charges,
- Is sold in an unregulated or light touch regulatory regime
- Could never pass the treating customers fairly ethos of UK Independent Financial Advice.
The following provides a summary of protection and the limits available via a UK authorised and regulated firm:.
Pension Protection Fund (PPF)
The Pension Protection Fund (PPF) was set up in April 2005 to protect pensions if an employer goes bust and its pension scheme can no longer afford to pay the promised pension. This only applies to defined benefit pension schemes (final salary schemes) where the pension is linked to salary and not to money purchase schemes which the pension is linked to the fund, investment returns and possibly annuity rates.
An eligible member once reaching the scheme's normal pension age will generally receive 100 per cent compensation from the PPF. The PPF will also generally pay 100 per cent compensation to those who have retired on legitimate ill-health grounds, regardless of age, and to those receiving a pension in relation to someone who has died.
If having not yet reached the normal pension age of the scheme, the PPF will pay up to 90 per cent compensation. This level of compensation is subject to an overall cap which is recalculated each year. At April 2009, the cap at the age of 65 equates to £28,742.69 (once account is taken of the 90 per cent level of compensation).
In all cases, increases in future payments are unlikely to be as much as expected.
Financial Services Compensation Scheme (FSCS)
The Financial Services Compensation Scheme (FSCS) is the UK's statutory fund of last resort for customers of UK authorised financial services firms. This means that FSCS can pay compensation if a firm is unable, or likely to be unable, to pay claims against it. This will generally be because it has stopped trading and has insufficient assets to meet claims, or is in insolvency.
FSCS covers business conducted by firms authorised by the Financial Services Authority (FSA), the independent watchdog set up by government to regulate financial services in the UK and protect the rights of consumers. FSCS protects:
- insurance policies;
- insurance broking (for business on or after 14 January 2005);
- investment business; and
- mortgage advice and arranging (for business on or after 31 October 2004).
The FSCS operates different levels of compensation according to the type of investment involved
- £50,000 per person
- £48,000 per person. (100% of the first £30,000 and 90% of the next £20,000 )
Mortgage advice and arranging
- £48,000 per person (100% of the first £30,000 and 90% of the next £20,000)
Long-term insurance (e.g. pensions and life assurance)
- 100% of the first £2,000 plus 90% of the remainder of the claim.
The best way to see what compensation basis applies is to examine the different types of investment in different types of pension arrangement.
Personal Pension Plans (PPPs)
Personal Pension Plans and Self Invested Personal Pensions (SIPPs) are operated by companies which are authorised by the Financial Services Authority (FSA). These normally are insurance companies and investment houses. In the case of SIPPs, some of these are operated by firms of Independent Financial Advisers (IFAs) and Trustee companies.
If one of the plan providers were to go into liquidation, the level of protection for the pension plan member depends on the nature of their investment.
These funds are held under trust for the benefit of the investors, the unit holders. They are therefore not available to the creditors of the Pension provider and are not at risk by the provider going into liquidation or receivership. The nature of most of these Funds is that they are in asset backed investments such as Shares, UK or overseas, and they will be hit by downturns in the relevant markets. There is no protection against this type of fall in the value of your pension saving.
With Profit Funds
These Funds are only run by insurance companies and we believe that they are at risk should the insurance company go into liquidation. In this case application can be made to the FSCS for compensation. It is also our understanding that the compensation basis will be that which applies to Investments, i.e. 100% of the first £30,000 and 90% of the next £20,000. The maximum amount of compensation will be £48,000.
This would only be found in SIPPs. The beneficial ownership of the shares lies with the trustees who hold them, in trust, for the SIPP member. As such, if the SIPP provider were to go into liquidation, these assets are not available to the creditors of the provider and so the questions of loss and compensation should not arise.
Such investments are of course vulnerable to loss due to falls in the stock market. Individual shares can also become worthless because the company concerned has failed. There is no compensation to cover either of these situations.
This is a more complicated situation due to the variation of practice by different providers. If the cash is held in a Bank in an account in the name to the individual plan (this is only likely to apply to a SIPP), the FSCS protection up to £50,000 will apply.
If the money is held in a provider’s client account with a Bank, the FSCS protection comes into play. However, there is some legal uncertainty as to whether the £50,000 limit applies to the whole account or to each individual. If this situation applies to you, you had best ask your provider in writing to clarify the position in writing.
Finally, there will be situations where the deposit is held in an account with the provider. In this situation the FSCS protection will also apply, provided the Pension provider is authorised by the FSA. There are uncertainties about this situation.
- It is possible that this will be treated as an investment rather than a deposit and so the £48,000 limit will apply.
- Also the legal status of the account could result in the appropriate limit applying to the account as a whole rather than to each individual within the account.
If the provider were to go bust, compensation from the FSCS is on the basis of the annuity being Long Term Assurance. The level of protection is unlimited and is calculated as 100% of the first £2,000 plus 90% of the remainder of the claim. The claim would be based on the value of the annuity and should include the level of spouse’s benefits, inflation cover and other features built into the annuity.
These fall into three categories –
- defined benefit (final salary schemes),
- defined contribution schemes (money purchase schemes)
- and schemes which are some sort of mixture of the other two categories (hybrid schemes)
Defined Benefit Schemes
The protection for these schemes lies with the Pension Protection Fund (PPF), referred to above. Protection only becomes applicable if the employer goes bust.
If monies are invested with an institution that goes bust, such as a bank or insurance company, the scheme trustees will need to make a claim to the FSCS.
Defined Contribution Schemes
The nature of these schemes is that the member gets the benefits that can be provided by the money in the member’s own account.
Protection will only come into play where there is an involvement by a company authorised by the FSA and therefore covered by the FSCS. The extent of any protection will depend on the nature of the investment involved (deposits and shares etc.) and will be treated in the same way as detailed above for Pensions.
The defined benefit element should be treated as above and qualify for the PPF while the defined contribution element should qualify, where appropriate for the FSCS compensation. However, the way these schemes are constituted varies and it is best to get confirmation from the trustees if you have concerns.
Additional Voluntary Contributions (AVCs)
Extra money paid into occupational pension scheme to provide additional benefits are known as AVCs. They can be used to buy additional service in the scheme and have the same security that applies to benefits under a defined salary scheme.
Otherwise they are invested providing an additional fund at retirement from which benefits can be provided. Regardless whether the scheme is a defined benefit or a defined contribution scheme, the security of this type of AVC will depend on how it is invested.
Overseas and Non UK Residents
Consumers considering or currently doing business with an EEA firm (European Economic Area) ('EEA Authorised'), may wish to ask for written further information from the firm or its UK branch about its complaints and compensation arrangements. This is because the position may differ compared to a UK authorised and regulated firm.
EEA Authorised firms can be exempt from the Financial Services Compensation Scheme and the Financial Ombudsman Scheme. These firms may be authorised by the EEA and show on the FSA register (http://www.fsa.gov.uk/) but they are not regulated by the FSA but hold a passport for their activities.