9.5 FSCS, Treating Customers Fairly and Conduct Risk

9.5 FSCS, Treating Customers Fairly and Conduct Risk

Even with the best regulatory framework, firms can fail. The Financial Services Compensation Scheme (FSCS) is the UK's statutory fund of last resort for consumers of authorised financial services firms. It pays compensation when a firm is unable, or likely to be unable, to meet claims — for example because it is in default, insolvency, or has been wound up. The FSCS is funded by levies on the financial services industry.

FSCS Protection Limits

The FSCS protects deposits, investments, insurance and mortgage business. Each class has its own compensation limit, set by the PRA (for deposits) and the FCA (for other classes).

Key Points

• The deposit limit applies per authorised firm, not per brand. If two banking brands share the same authorisation, the £120,000 limit is shared across both.
• The £120,000 figure applies to firm failures occurring on or after 1 December 2025. For failures before that date, the previous £85,000 limit applies.
• Eligibility for FSCS depends on the class of business and the claimant's status — most retail customers, sole traders (with claims relating to the business) and small charities are eligible.

Treating Customers Fairly (TCF)

The FCA's Treating Customers Fairly (TCF) initiative, introduced in the mid-2000s, set out six outcomes that firms should aim to deliver. Although the FCA has since moved to the more demanding Consumer Duty, TCF remains a touchstone for fair customer outcomes.

The Six TCF Outcomes

1. Consumers can be confident that they are dealing with firms where the fair treatment of customers is central to the corporate culture.
2. Products and services marketed and sold in the retail market are designed to meet the needs of identified consumer groups and are targeted accordingly.
3. Consumers are given clear information and are kept appropriately informed before, during and after the point of sale.
4. Where consumers receive advice, the advice is suitable and takes account of their circumstances.
5. Consumers are provided with products that perform as firms have led them to expect, and the associated service is of an acceptable standard and as they have been led to expect.
6. Consumers do not face unreasonable post-sale barriers imposed by firms to change product, switch provider, submit a claim or make a complaint.

The Consumer Duty

From 31 July 2023, the FCA's Consumer Duty (PS22/9) raised the bar above TCF. The Duty requires firms to deliver good outcomes for retail customers and consists of:

• An overarching principle (Principle 12): a firm must act to deliver good outcomes for retail customers.
• Cross-cutting obligations: act in good faith, avoid foreseeable harm, enable retail customers to pursue their financial objectives.
• Four outcomes:

The Consumer Duty is outcomes-based: firms must monitor outcomes and act on poor outcomes, not just comply with rules.

Conduct Risk

Conduct risk is the risk that a firm's actions — or inactions — cause poor outcomes for customers or market integrity. Unlike prudential risk (the risk of firm failure), conduct risk is about the behaviour of the firm in its dealings with customers.

Examples of Conduct Risk

• Mis-selling of products that do not meet customer needs.
• Excessive charges not justified by the service provided.
• Withholding information that would have changed the customer's decision.
• Inadequate post-sale support that prevents customers from making changes.
• Conflicts of interest that bias advice towards higher-commission products.

Managing Conduct Risk

Conduct risk is the lens through which the FCA now examines firms. Reducing it is the responsibility of every individual in the firm, not just compliance staff.