When you seek financial advice, you might assume that working with a firm registered and regulated by the Financial Conduct Authority (FCA) offers reassurance and guarantees. After all, these firms are required to maintain professional indemnity (PI) insurance to cover potential claims. However, recent trends suggest that consumers may need to reassess how much protection is truly in place.
In the last two months alone, 13 financial advice firms have been declared in default by the Financial Services Compensation Scheme (FSCS). To put this into perspective, that’s over a third of the total 36 defaults declared throughout 2024. A default means the firm has gone out of business and is unable to meet claims, leaving consumers reliant on the FSCS for compensation.
The Rising Cost of Defaults
When a firm fails, the first £85,000 of any successful claims that cannot be paid fall on the FSCS—a safety net funded by the industry. However, this lifeline is facing increasing pressure. Consider these recent figures:
- Alexander David Securities Limited: £4.5 million in compensation paid by November 2024.
- Castle & Crystal Credit Union Limited: £2.4 million in compensation.
While the FSCS provides vital support, the growing number of defaults raises concerns about the sustainability of this model and its impact on consumers and the industry alike.
Why PI Insurance Doesn’t Always Protect Consumers
Professional indemnity insurance is meant to act as a safety net for firms, covering claims of negligence or poor advice. However, PI insurance doesn’t always deliver when claims fall in excluded categories, or premiums are unpaid, and when firms face financial challenges or collapse. In such cases, consumers are left to turn to the FSCS, which can lead to significant delays and uncertainties.
What Does This Mean for Consumers?
The rise in defaults highlights the importance of understanding the risks involved in seeking financial advice, even from regulated firms. While regulation and the FSCS offer layers of protection, they are not foolproof. Here are some steps you can take to protect yourself:
- Research Your Adviser: Check the FCA Register for up-to-date information on the firm and its status.
- Ask Questions: Inquire about the firm’s PI insurance coverage and its financial health.
- Be Prepared: Understand the FSCS process and what compensation may (or may not) be available if a firm fails.
FSCS: A Vital Safety Net
The FSCS remains a cornerstone of consumer protection, providing free, independent support for those affected by firm failures. Its chief communications officer, Tina Coates, emphasises their mission to maintain trust in the financial services sector:
“We work hard to ensure people get the compensation they’re due, while continuously improving our service and claims processes.”
However, relying solely on this safety net is not enough. As a consumer, being proactive and informed is your best defence against potential financial shocks.
A Call for Change
The growing pressure on the FSCS underscores the importance of shifting towards greater accountability and resilience in the financial advice industry. At the Academy of Life Planning, we believe in empowering individuals with the tools and knowledge to take charge of their financial futures. Through our “Planning My Life” programme, we help people build confidence in managing their own finances, reducing reliance on traditional advice models and creating a more transparent, balanced approach to financial planning.
By promoting education and self-directed planning, we aim to minimise the risks associated with firm defaults and help consumers achieve financial security on their own terms.
If you’re ready to explore a new way of planning your finances—one that prioritises your values and goals over outdated systems—let’s start the conversation today. Together, we can work towards a more secure and empowered financial future.
Warm regards,
The Academy of Life Planning Team
Academy of Life Planning 