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FSCS set to pay out without full claims probe

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FSCS set to pay out without full claims probe

The Financial Services Compensation Scheme (FSCS) will be allowed to compensate investors without fully investigating their claims to have lost money.

According to new rules proposed by the Financial Services Authority (FSA), the regulator has proposed allowing the FSCS to make payouts to investors without assessing their eligibility, or the amount of their claim, where it was not ‘proportionate’ to assess the case.

The City watchdog said firms paying the levy may feel the new rules ‘unfair’ but argued change was essential to ensure the efficiency of the FSCS.

The relaxed eligibility rules will also mean the directors, managers of failed firms and their close relatives will be entitled to compensation on their investments from the FSCS.   This would not absolve them from any responsibilities in the event of wrong doing, but would simply speed up the claims and compensation process.

The FSA put forward the changes to the rules in an attempt to allow the FSCS more flexibility in quantifying claims following delays in high profile cases like Keydata clients invested in life settlement ‘fund’ Lifemark.

The FSCS will also automatically acquire investors’ right to take legal action against former advisers and product providers, according to the proposed rules.

Higer compensation costs

The FSA warned the new rules could lead to higher compensation costs due to the eligibility for FSCS claims being extended. 

This means that the threshold for the annual levy may be reached sooner than in previous years and leading to more cross subsidy from other levy classes, according to the FSA.

This is only a risk, the FSA added, pointing out that in practice only an extreme case is likely to be a trigger.

‘We do not think that this would occur in practice, except in an extreme case, as since 2008 cross-subsidy has been triggered only once, in 2011,’ the FSA explained.   

In a consultation paper on the FSCS the FSA said: ‘Our proposed rule changes will help the FSCS when the value of a claimant’s investment is uncertain. We propose to give the FSCS some additional flexibility in appropriate circumstances to pay full compensation where, under present rules, consumers would have to wait an excessively long time to receive full compensation.’

‘In other cases the cost to the FSCS of assessing a claim may exceed the compensation due. We believe the proportionate approach is to give the FSCS the ability (similar to the approach for deposits) to pay compensation without a full investigation if the costs of investigation are disproportionate to the benefits.’

The consultation will close on June 2012 after the FSA cut the normal consultation period from three months to one.

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