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A product levy could be the fair way for the FSCS

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The Financial Ombudsman Service and Financial Services Compensation Scheme are both planning reforms which attempt to ensure industry costs better reflect the risk posed by individual firms.

The Financial Ombudsman Service is proposing a dramatic increase in the number of free cases a small firm has each year before paying a £500 case fee from three to 25.

The move, set to be introduced next April, is part of a package of measures designed to ensure the cost paid by firms is better aligned to the amount of work they create.

An increase in the number of “free” cases has been a long-running Aifa lobbying campaign and it is good to see the FOS listening. The only negative is that network members will not benefit from this increase as the free cases apply to the network rather than individual firm.

FSCS chief executive Mark Neale last week set out some of the options for funding reform ahead of this year’s review. He suggested the scheme will be looking at pre-funding options and a risk component to funding.

Any plans would have to be aligned with the forthcoming European investor compensation scheme directive and there is still some dispute at a European level over the issue of pre-funding and compensation limits.

Following the huge bills for Keydata and a number of failed stockbrokers, many advisers will welcome the FSCS’s intention to ensure costs fall primarily on those responsible for the failings. However, regulators do not have a good track record in assessing future risk and it remains to be seen whether such risk-based levies would be practicable. One possible solution would be a further breakdown of sub-classes so advisers are not left in the same bracket as stockbrokers and the likes of Keydata.

The obvious danger with pre-funding through increasing FSCS reserves is that, in the short term, firms will see an increase in costs to pay for current and future claims. Given economic conditions, this looks an unpalatable option.

Neale came out strongly against a product levy in an interview with Money Marketing last year, describing it as “a tax on consumers”. We hope he has had time to reconsider this opposition. Regulatory costs are ultimately passed down to the consumer anyway and a product levy could well be a cleaner and more transparent way of setting out the cost to consumers of the FSCS guarantee.

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Readers' comments (8)

  • The problem is that what we have now was created by the industry as a whole, they thought they could manage their own money better than the FSCS ever could, that may be in part true but the whole thing is unworkable for a number of reasons.

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  • No intermediaries are asking to be exempted from responsibility for the consequences of poor advice, but why shouldn't consumers be required to contribute to the costs of their own protection against losses incurred as a result of factors entirely outside the advice process?

    By Mark Neale's line of reasoning, nobody should have to pay towards the costs of supporting the NHS if they never use it.

    That aside, the principal obstacle to this proposal is that if intermediaries are no longer required to fund it, the FSCS will have nowhere to turn for extra levies to make good any shortfalls in its budget.

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  • Agree.

    This must also be the route for the FOS costs as well.

    If consumers demand protection they should pay for it directly rather than via some increased fe charge or, worse still, lower profits for advisers.

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  • The PPF is financed by a levy on pension schemes with those at a higher risk paying a higher levy.

    This should apply to financial products as well.

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  • Some sense is being spoken at last.......

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  • A product levy s I feel the best way forward in conjunction with an up front charge to complain refunded if successful.

    Dont forget most small IFA practices are within networks so the 25 free case option is irrelevant

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  • I've been advocating a product levy ever since FOS first started. Consumer wants protection, consumer pays directly or indirectly.

    As for a £500 fee, many of the cases should be sorted in less than 5 hours of work, if the adjudicator is even half up to the job!

    If there has to be a fee (and there probably does), stop all these ambulance chasers by making consumers pay a modest fee, say £200, or £100 if there is hardship and no ambulance chasers are involved. If the case goes the consumer's way, they get the fee back, but not otherwise.

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  • The FSA is talking about moving to a fee calculated as a percentage of IFA turnover, the FSCS has already started down this track so it makes sense for the FOS to do the same.

    This is effectively a product or advice levy as in the spirit of transparency we will all be able to add it directly to our fees. Then clients see what the f-pack costs and can decide whether they think that is worth paying for.

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