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September 21, 2012

Doubts emerge about FSA compensation scheme

The compensation system for small firms that have been mis-sold complex financial products has serious failings, the Federation of Small Businesses (FSB) has told the Chancellor.

Following a meeting with the Financial Services Authority (FSA) — the independent regulator that devised the system — the FSB has said the redress process does not have the confidence of small firms, lacks transparency and will not help those firms affected as quickly as needed.

The FSA's pilot scheme is due to start on Friday 21 September and will involve 50 claimants from each of the banks. The FSB is demanding an urgent re-think and says it isn't too late to implement a redress process, totally independent of the banks.

While the FSB says it agreed with the findings of the FSA's report of June 2012 showing evidence of mis-selling, it does not agree with its proposed method of redress. Instead, the FSB has called for an independent system, run separately from the banks that mis-sold the products.

The FSB has suggested a system with five key principles:

  1. Clear and objective rules must be agreed by the banks, the FSA and the business community to assess eligibility;
  2. The scheme must be independently run and separate from the banks that mis-sold the products;
  3. Redress must be swift as small firms are still paying high amounts of money for these products, impacting cashflow and in some cases costing jobs;
  4. The scheme must be transparent;
  5. There must be a clear appeals process that does not go through legal routes.

John Walker, FSB national chairman, said: "This is not the first time we have raised our concerns with the FSA. We're deeply concerned that, as it stands, the scheme provides no incentive for the banks to go and find the small firms that have been affected to compensate them. The views of small firms have been completely ignored in designing the redress process and we've had little response to our concerns from the FSA."

He added: "Small firms have been badly affected by the mis-selling of these schemes. However, without the key element of independence, small firms will be deeply sceptical that the very bank that mis-sold the product to them is running its own compensation scheme."

The FSB has produced a guide for small firms that are concerned they may have been mis-sold financial products.