Financial watchdog looks at extending consumer protection for pensions

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Consumers' cash could be given wider protections by the UK's savings safety net under proposals from the City regulator. 

The Financial Conduct Authority (FCA) is consulting on changes to rules surrounding the Financial Services Compensation Scheme (FSCS), which compensates consumers when financial firms go bust.

The FCA is considering whether compensation limits should be changed in the light of the new pension freedoms, which were introduced in 2015 to give people a wider range of choices over how they use their pension pot.

One possible option could be to introduce higher claims limits for investment arrangements or services which were being used purely for retirement planning.

The regulator has suggested the compensation limit for someone if an investment business went under could be increased from £50,000 to as much as £1 million.

The pension freedoms mean people are no longer required to buy a retirement income called an annuity and instead they can put their cash in other places, such as investments.

The compensation limit for insurance-based annuities if a firm fails is set at 100% of the loss, with no upper limit.

Proposals also include introducing FSCS coverage for debt management firms and applying FSCS protection to advice.

The FCA said it does not currently believe there is a need to introduce FSCS coverage for peer-to-peer lenders, but it would like to hear views on this.

Christopher Woolard, executive director of strategy and competition at the FCA, said: "The Financial Services Compensation Scheme plays a vital role in ensuring consumer confidence in financial services.

"We want to ensure protection for consumers and fairness for firms that pay for the compensation.

"We want to have a full debate with all interested stakeholders and this paper sets out the range of fundamental issues we want to discuss."

The FCA is asking for responses to its consultation paper by March 31 2017.

In November, the Bank of England launched a consultation into restoring the FSCS savings deposit protection limit if someone's bank or building society goes bust to £85,000. 

The compensation limit was previously cut to £75,000 in 2015, at a time when sterling was stronger, to keep it in line with an EU directive which said deposit protection limits needed to be the equivalent of 100,000 euro.