Aifa says FSCS product levy not viable

Aifa believes a product levy to cover Financial Services Compensation Scheme costs is not politically viable and is wary about the extra short-term costs of moving to other pre-funded models.

The FSA is expected to consult on a review of FSCS funding in the first half of this year. Last week, FSCS chief executive Mark Neale argued reform should focus on reducing unpredictability for firms, potentially through pre-funding or through introducing a risk-based element to the scheme.

Aifa director Robert Sinclair warns pre-funding through building up a big reserve would lead to higher costs for firms who would be paying for current and future claims at the same time.

He says: “Building up a significant fund would mean a succession of years of paying in. That just sucks capital out of firms.

“While we understand the attraction of pre-funding, from a risk and regulatory perspective, it is something we have to think very carefully about.”

Aifa’s preferred funding model would be to calculate firms’ liability based on risk. Last year, Aifa proposed creating a new professional adviser FSCS sub-class so advisers would not be exposed to the failings of stockbrokers or firms such as Keydata.

Sinclair says a product levy, the funding option that is favoured by many advisers, is unlikely to gain political traction.

Last year, Neale warned that a product levy was “a tax on consumers”.

Sinclair says: “Any acceptance in the UK for a product levy would be very much aligned to a financial transaction tax. Therefore, I think that is unlikely to see the light of day.”