The Public Accounts Committee has concluded that current compensation arrangements do not always protect consumers, can create extra costs for firms and may not have the capacity to cope with future risks in the advice market.

The standard approach taken to redress relies on consumers seeking compensation, but the Committee’s report on the Financial Conduct Authority’s handling of British Steel Pension Scheme members revealed only 25% of savers who received unsuitable advice have raised claims with redress organisations.

Similarly, despite the redress process being free to use, 72% of complaints to the Financial Ombudsman and 40 per cent of claims to Financial Services Compensation Scheme are being made through third party representatives such as claims management companies and solicitors.

For redress arrangements to work effectively, the Public Accounts Committee concluded that firms should have professional indemnity insurance to afford the cost of compensation, yet many advice firms are unable to access cover.

There is an alternative to professional indemnity insurance, which has been proposed by the Personal Finance Society repeatedly over the last five years. This would involve a very small levy on funds under management in the UK, which would then fund compensation claims for investment clients. It would not result in any less compensation to consumers, but it would mean that issues around professional indemnity insurance premiums and availability of adequate cover would no longer apply.

However, this reform would need the support of the Treasury as well as the FCA and, so far, the former has been unwilling to take responsibility for the issue, and the latter is powerless to make the necessary changes to primary legislation.

We are continuing to call for the FCA to ditch plans to mandate compensation in the form of a lump sum, since such compensation does not address the central issue of British Steel Pension Scheme members giving up a guaranteed income.

Matthew Connell is director of policy and public affairs for the Personal Finance Society.

• This column first appeared in Financial Planning Today magazine, Sept-Oct 2022 edition. Matthew's column appears in each issue of the magazine. You can subscribe to the magazine by registering for this website and then checking package options.