'Cross-subsidies axe raises adviser risk'
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Aifa has warned that getting rid of the current system of cross-subsidies to fund the Financial Services Compensation Scheme would mean advisers facing higher levels of risk in the event of companies failing.
The Government’s consultation on scrapping the FSA in favour of a Consumer Protection and Markets Authority and Prudential Regulation Authority proposes that the CPMA and the PRA will each have powers to draw up rules relating to compensation and levies for the different firms they regulate.
This could lead to separate compensation schemes run by each body and thus the end of the current cross-subsidy system.
Aifa director of policy Andrew Strange warns that losing cross-subsidisation would mean advisers facing higher liabilities.
Strange says: “Within the cla-sses, we have campaigned long and hard to achieve cross-subsidy between advisers and providers so in the investment class, there is a £100m cap.
“If another institution like Keydata failed but one with a cost of £500m, we would only have to pay £100m. The slack is picked up by the providers. If you lose that cross-subsidy, it does not seem to be very fair in the event of a product failing.
“If anything like Keydata happened again, we would have a much higher level of risk sitting there behind us.”
SimplyBiz chairman Ken Davy agrees. He says: “In the case of product providers and product failings then I can see a logic in a cross-over because there could be massive defaults. Therefore some element of cross-subsidy is still important.”
Aifa lobbied for a crosssubsidy of FSCS levies when the scheme was last reformed in 2007, arguing that providers needed to take more responsibility for the distribution chain.
The ABI and British Bankers’ Association both argued against any form of cross-subsidy and a compromise was reached where a cross-subsidy would occur within the product class if the individual levy exceeded a certain amount.
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