Urgent FSCS reform must be made a priority

4 February 2011 3:04 pm | By Paul McMillan

As the anger continues over another huge Financial Services Compensation Scheme interim levy the regulatory authorities fail to prioritise the need for reform.

For the second year many small IFA firms are facing huge levy payments, in some cases wiping out significant amounts of profit. Firms already dealing with the demands of increasing qualification levels, changing business models and holding more capital are being asked to stump up considerable sums for the failings of others.

For many advisers the effects of this year’s levy have been magnified by a change in the way the levy is calculated leading to bills far in excess of what they had budgeted for.

That the cause of most of the levies were products the majority of IFAs have avoided and in many cases warned against before problems occurred has only added to the ire.

One outrageous levy advisers could perhaps stomach, but this second interim levy has created a tipping point.

Without reform will this type of interim levy now become a regular event? It would be a brave person who would guarantee there are no future problems lurking underneath the bonnet amongst the huge variety of 6,500 firms that make up the intermediary sub-class.

Anger has grown over the last year among advisers, leading to the unsuccessful High Court case against the FSCS, but IFAs are not alone in their fury over the status-quo.

Building Societies have spent the last couple of years campaigning against what they see as a regulatory imbalance in FSCS funding which means they pay disproportionately high cots due to their focus on retail deposits.

The FSCS has itself warned that the huge sums being levied on general insurance brokers on the back of PPI claims could potentially lead to small brokers going bust.

For this year’s interim levy fund management groups are sharing the pain already felt by advisers with eye-watering sums expected to be revealed when the big asset managers report their results.

And what are the regulatory authorities doing to address this growing tide of anger from across the industry?

The FSCS says it understands the significant impact on levypayers but that it is following the rules that have been laid down.

When questioned by MPs this week, Treasury financial secretary Mark Hoban seemed to use the reasoning that if everyone is complaining about FSCS funding then the system cannot be unfair.

Investment managers may be complaining now to Hoban about cross-subsidy but they were lucky to get away with not having to pay for the first Keydata levy. Under the current FSCS sub-class system the cross-subsidy feature within product classes is an important safety valve in the event of a catastrophe in the distribution sector. It was introduced when the FSCS was last reformed despite intense lobbying from the BBA and ABI.

The FSA promised us that a much-needed review of FSCS funding would kick off late last year but then in November announced the consultation would be put on ice as the upcoming regulatory restructure is likely to affect the scheme.

As part of its plans for regulatory reform, the Government is looking at how the compensation scheme will fit around the new Consumer Protection and Markets Authority and Prudential Regulation Authority, with a number of proposals being looked at, some of which would end provider/intermediary cross-subsidy.

The FSA this week refused to commit to any kind of time scale for consulting on FSCS reforms until it receives more clarity about the regulatory landscape. Lansons director Richard Hobbs suggests this could mean FSCS changes are years away.

FSCS levies for 2011/2012 were unveiled this week and new rules would need to be in place by the end of this year to affect 2012/2013 levies.

Sitting in an office in the FSA’s Canary Wharf HQ I’m sure this sounds like a sensible prioritising of commitments, especially with the avalanche of reforms on its hands and work taking pace at a European level around funding compensation.

However, it also ignores, or at least hugely underestimates, the anger which continues to grow across the industry due to a sense of unfairness about the current regime.

There may be no easy solutions to creating a fairer compensation scheme overnight. But ideas such as product levies, pre-funding and insurance schemes have their merits, and drawbacks, and should be looked at closely by the regulator.

In terms of the current interim levy, If a decent sum can be salvaged from Lifemark’s portfolios this may be rebated back to the industry- although investors who have lost over £48,000 may be first in line for any extra payments. The FSCS should also be prepared to recover payments from any large firms which are found to have missold Lifemark products, with any money rebated to the industry.

But looking to the future, the “polluters’ competitors pay model” for compensation based around the current sub-class definitions has stretched advisers’ tolerance levels to breaking point.

The regulator should be recognising this anger and looking to lead a sensible review of FSCS funding as soon as possible.

Paul McMillan is editor of Money Marketing - follow on twitter here

Martin Bamford’s FSCS Levy Action Group continues to collect signatures for its petition against the FSCS levy here.

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