The FCA is to review Financial Services Compensation Scheme limits and funding class thresholds in the next step in its plans to improve the compensation framework.

The regulator has been reviewing the framework for protection provided by the FSCS following concerns about spiralling costs.

Its review aims to make sure the compensation framework provides an appropriate level on consumer protection while distributing the costs to the industry in a fair and sustainable way.

Following an industry consultation, the FCA is now starting work to review compensation limits to consider whether they are appropriate for different types of claims.

It is also reviewing funding class thresholds to consider whether the class thresholds remain at an appropriate level.

The regulator will also carry out consumer and firm research in conjunction with the FSCS, to improve its understanding of the impact of FSCS protection on consumer decision making, confidence and behaviour, and on firm behaviours and incentives.

The regulator had shared concerns that the current framework could create a barrier to firms entering or staying in the market.

Today it shared a summary of the feedback it had received from the industry to the first phase of its review.

The main theme from the feedback was the importance of firms improving their conduct so there were fewer calls on the FSCS from mis-sold products or failed firms.

Feedback also focused on the need for firms to be more financially resilient to address the underlying causes of high redress liabilities.

Sheldon Mills, executive director of consumers and competition at the FCA, said: “We welcome the constructive engagement and feedback which will inform the next phase of this work.  

“We want to make sure the cost to industry for providing vital protection to consumers through the FSCS is distributed in a fair and sustainable way – that the polluter pays. We’re continuing our assertive action to prevent harm from happening in the first place, which should help reduce the levy over time.”

The FCA is also taking action to tackle the root causes of high redress liabilities and crack down on problem firms as part of its consumer investments strategy.

Measures include preventing firms that could cause harm from entering the market (with one in five firms now being rejected for authorisation), placing twice as many restrictions on firms to prevent them from promoting or selling certain products and services and using emergency powers to prevent firms who advised members of the British Steel Pension Scheme (BSPS) from disposing of assets to avoid paying compensation.