Regulatory and Compliance Training & Consultancy

Changes to the Financial Services Compensation Scheme

January 2016

On 1st January 2016, changes to the Financial Services Compensation Scheme (FSCS) were introduced which have seen the level of cover provided to eligible individuals under the scheme reduced from £85,000 to £75,000.

As it is likely that you will have to update your firm's terms of business to reflect this important change (if you have not already done so) you should take into account not only the reduction in the threshold, but the other features of the scheme which have also changed.

Whilst it is improbable that you would be held liable for losses resulting from a banking failure, it would be prudent to seek to limit your potential liability to clients and your terms of business should reflect this. However, do not forget that under the SRA Code of Conduct 2011 you cannot seek to exclude, or attempt to exclude, liability below the minimum level of cover required by the SRA Indemnity Insurance Rules 2013 (currently either £2m or £3m dependent upon the structure of the business). You may also state in your terms of business that if you make a claim under the FSCS in respect of client money on your clients' behalf, you will, subject to their consent, give certain client information to the FSCS to help them identify clients and any amounts to which they are entitled.

Historically, the FSCS only provided cover to private individuals and small companies. However, cover is now available for large companies and small local authorities as well. This is a welcome change for many.

Whilst the standard level of cover under the FSCS has been reduced to £75,000, the scheme does provide a £1m protection limit for temporary high balances held with a bank, building society or credit union if it fails. Whilst this extended cover is limited to specific life events and only available to natural persons, it provides a substantial increase in the level of cover available to solicitors' private clients for up to six months. This is particularly relevant to the legal sector as many of the events which are covered by the FSCS under the extended cover relate directly to the types of matters which solicitors are likely to deal with including sums paid to the depositor in respect of:

• Real estate transactions (property purchase, sale proceeds, equity release)
• Benefits payable under an insurance policy
• Personal injury compensation (unlimited amount)
• Disability or incapacity (state benefits)
• Claims for compensation for wrongful conviction
• Claim for compensation for unfair dismissal
• Redundancy (voluntary or compulsory)
• Marriage or civil partnership
• Divorce or dissolution of civil partnership
• Benefits payable on retirement
• Benefits payable on death
• A claim for compensation in respects of a person's death
• Inheritance
• Proceeds of a deceased's estate held by their Personal Representative

Deposits over £75,000 are protected up to six months from when the amount was first credited or from the moment a qualifying deposit became legally transferrable. ‘Temporary’ means that the deposit must have been credited to the account (or become legally transferable if that is later) no more than six months before the firm goes into default.

The Law Society suggests that both traditional firms of solicitors and Alternative Business Structures (ABS) make their clients aware of the following points:

• It is unlikely that the firm will be held liable for losses resulting from a banking failure.
• The name of the deposit-taking institution(s) in which their money is held.
• The FSCS limit of £75,000 applies to the individual client, and so if they hold other personal monies themselves in the same deposit-taking institution as the firm's client account, the limit remains £75,000 in total.
• Some deposit-taking institutions have several brands, ie where the same institution is trading under different names. Clients should check either with their deposit-taking institution, the FCA or a financial adviser for more information.
• Consent will be sought for any disclosure to the FSCS of client details in the event of a deposit-taking institution failure.

If your concerned that your terms of business and might be out of date why not let us review and update them for you? To find out more about the training and consultancy services we can provide to support your firm please contact Richard Lane on 0330 223 5346.

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