The announcement came as part of the regulators business plan published this morning, in which it said it will review the compensation policy framework to ensure that it is appropriate, proportionate and takes changes in the market into consideration as well as the FCA’s regulatory approach.

The FCA said it wants to ensure firms do not fail in a “disorderly” manner. The regulator said in order to achieve this it will look to require firms to hold “financial resources proportionate to the potential harm” caused to consumers if they do fail.

The regulator said the review will, over time, reduce the level of FSCS payouts and allow it to reduce the FSCS levy on the industry.

The regulator’s business plan said: “We want the scale of compensation liabilities to stabilise in the medium-term and reduce longer-term as firms hold more capital and liquidity, and fewer cause misconduct that requires them to pay redress on a large scale.”

Wealth management trade association PIMFA has welcomed the review of the FSCS and said it is encouraging that its recommendations on FSCS levy reform have largely been adopted in the FCA's plans released this morning.

However, Tim Fassam, director of government relations and policy at PIMFA, said the FCA needs to use the tools available to it better.

He said: "PIMFA has regularly raised concerns about the FCA’s standard of supervision in the past which, we consider, has contributed to firms failing, consumer detriment and ever rising and unsustainable Financial Services Compensation Scheme (FSCS) bills for the vast majority of well-run firms in the market.

"We set out a number of recommendations in our recent paper on FSCS levy reform and it is encouraging that these have been largely adopted in the FCA’s plans to improve its processes and oversight of firms published today.

"However, we are clear that this cannot simply involve the provision of new rules and a further expansion of the Handbook. The FCA needs to use the tools already available to them better. To this end, we look forward to the fruits of its data strategy work being implemented to ensure firms are providing data with a purpose rather than just because it is an obligation."

In its business plan, the regulator said its review of the FSCS will be just one of many changes as part of its commitment to be a more innovative, adaptive and assertive regulator.

Nikhil Rathi, chief executive at the FCA, said: “Over the next 18 months you will continue to see an FCA that looks and feels even more different. One that operates differently, partners differently, and communicates differently.

“One that delivers market integrity and delivers for the consumers that we serve. One that is not only purposeful but that is fit for purpose.

“There is a lot of work to do. And I am confident that we have the right strategy, the right people and the right ambition to do it.”

Priorities listed by the FCA include:
• Strengthening rules on financial promotions to protect consumers in relation to investments
• Continuing to improve standards of pension advice
• A consumer campaign on scams and high-risk investments
• Progressing proposals for a new Consumer Duty to raise standards in firms’ treatment of consumers
• Using the FCA’s authority and influence to work with partners to help drive down the incidence and impact of fraud
• Improving diversity and inclusion, both at the FCA and in regulated firms
• Supporting environmental goals by adapting the regulatory framework to enable a market-based transition to net-zero carbon emissions

The regulator said that it will also be consulting on changing the balance between decisions taken by the FCA executive and the Regulatory Decisions Committee. The proposed changes aim to streamline decision making on authorisation applications and specific supervisory and enforcement decisions.

The regulator also said that it is exploring opening an office in Leeds, in order to become “a regulator for the whole of the UK”, with at least 100 staff based there in the first phase. It is also looking to establish a presence in Belfast and Cardiff.