FSCS' annual report – historic claims but a present danger?

The FSCS has published its annual report for the 2022 – 2023 year. This shows a drop in compensation paid overall in comparison to the previous year but historic claims could still come back to haunt insurers.

The FSCS has published its annual report for the 2022/23 year. During the period the FSCS has paid compensation relating to 563 different firms. However, only 64 firms were declared in default for the year, the majority of which were advice firms. 

We can therefore easily deduce that the majority of the firms in respect of which compensation was paid were declared in default prior to 2022/23. The FSCS expects to continue to receive complaints throughout 2023/24 regarding advice given by firms that were declared in default previously. 

The stark difference between the number of firms in respect of whom compensation was paid and the number of firms declared in default demonstrates that the risk to insurers from potential FSCS claims has a long tail; the FSCS can take an assignment of rights from claimants on paying compensation and can then use those rights to make claims against Insurers under the Third Parties (Rights Against Insurers) Act 2010. Insurers could very well face information requests or claims (or indeed both) concerning insured firms declared in default long ago and in respect of whom they might have assumed any residual risk had evaporated. 

One positive is that the overall sums paid in compensation for the year was £403 million, which was down 30% on the prior year, during which £584 million was paid. This comes partly as a result of lower total sums being paid in compensation across both the Life Distribution & Investment Intermediation and Investment Provision funding classes. 

Speaking of historic risks, the spectre of British Steel haunts the report - the number of former members compensated to the end of the year increased to 1,600 (up from 681 at the end of the previous year) with a total of £69 million now paid in compensation.

The question is, how active will the FSCS be in pursuing recoveries going forwards? The report notes that there has been a significant increase in the costs of pursuing recoveries, which seems to have come from an increased legal spend – this could perhaps weigh on the FSCS' decision-making process when considering if a recovery action would be cost effective. However, we can expect the FSCS to pursue recoveries where it is reasonably possible and cost effective to do so. In our experience, if the FSCS does approach you for information pending a potential recovery claim, the best approach is to investigate and respond constructively from an early stage.