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The Association of Independent Financial Advisers (Aifa) has warned that proposed reforms to the Financial Services Compensation Scheme (FSCS) could encourage false claims and lead to increased costs for the industry.
Aifa, responding to the Financial Services Authority (FSA) consultation on reforming the FSCS, also called for a delay to any changes to the way the scheme is structured and funded to bring them into line with a wider review of compensation scheme funding.
In March the FSA proposed that the scheme be allowed to compensate investors without investigating to confirm they have lost money.
In its consultation paper the regulator suggested the FSCS could make payouts to investors without assessing their eligibility, or the amount claimed, where it was not ‘proportionate’ to assess the case.
However Aifa has hit back at the FSA’s ideas arguing that relaxing the checks on the validity of claims could lead to wave fraudulent claims.
Chris Hannant (pictured), Aifa policy director, said: ‘We are particularly concerned that relaxing the process by which consumers are able to seek compensation under the FSCS will encourage fraudulent claims.’
‘We already see that, alerted by media coverage and claims management companies, some consumers in the hope of a compensation payment will complain to the Financial Ombudsman Service about policies they do not and have never held. Similarly if the FSCS were to eliminate the application form stage of their process, this could open the floodgates to fraud and increase investigation costs.’
Hannant added: ‘We also now seem to be moving to a position where it is assumed that all investors in a default are eligible for compensation. By paying out without a full investigation of individual circumstances, FSCS is creating a zero risk environment for investors.'
The Investment Management Association (IMA) agreed a wider review was required, arguing the current proposals failed to consider the impact of cross-subsidy liability.
Guy Sears, IMA director of wholesale, said: 'We’re disappointed to see that the bulk of the proposal concentrates on improving administrative processes within the FSCS at a time when the scheme rules need a complete overhaul.
'These areas should be suitably addressed under one extensive review to ensure the rules operate to provide protection, that the scheme secures appropriate funding and that consumers understand the nature and extent of any protection.'