Lighthouse chief executive Malcolm Streatfield has called for Financial Services Compensation Scheme levies to be based on profit rather than turnover and branded the current levy calculation method “abject nonsense”.
Speaking at the Money Marketing Retirement Summit in St Albans earlier this month, Streatfield hit out at the FSCS funding model, saying it represents a “disproportionate tax” on good advice firms.
He said: “The entire adviser channel is said to produce £900m in profit a year, and when a levy can be applied on £150m of that in any given year, it shows how the FSCS levy is extreme in its application.
“I remember one year expecting a regulatory bill for £1m, and that would have been quite an increase on the year before. But when the bill arrived it was £1.5m. The annual profit expectation for my business was £1.5m. Halfway through your trading year, you get a bill for £500,000 a year more than you were expecting.
“There are countless examples of good quality adviser businesses where their total profit is being wiped out by the FSCS levy, so it becomes nothing more than a disproportionate tax. I get the impression that the people in charge of making decisions on this are reluctant to make change, and are just playing at the edges.”
Streatfield suggested FSCS levies would be easier to manage and ultimately fairer if they were based on a proportion of profit.
He said: “We all have a vested interest in ensuring the great British public are protected from firm failure, and that things are put right quickly with compensation paid.
“But the pool should be widened, and levies shouldn’t be calculated on a turnover basis but on a profit basis. If you amalgamated the profits from all the firms regulated by the FCA and Prudential Regulation Authority, decided the levy and set a percentage, I bet the percentage would be less than 1 per cent a year of profits to fund the FSCS adequately.”
He added: “A sole trader adviser making a profit of £100,000 a year and asked to pay £1,000 into the fund would not object to that. Equally, if Europe’s biggest bank was asked to put tens of millions of pounds in, this would be small change to them.
“A simple levy on profits of those trading and regulated in the financial services industry would be far more equitable. What we have at the moment is an abject nonsense, and lifting 15 to 20 per cent of the whole of the advice sector’s profits in one levy is not sustainable.”
Law firm Reed Smith partner Tim Dolan agreed the way the FSCS is funded is not fit for purpose.
Dolan said: “The funding of the scheme is far too complicated and confused. The idea of grouping firms together under quite weird bandings where they pick up the tab for each other in the event of a firm failure doesn’t make sense to me.
“A lot of firms also have difficulty implementing the fee tariff data to establish what their FSCS levy requirement actually is. From a firm’s perspective the unpredictability of what the levy will be in any given year doesn’t work.”
He added: “I would like to look at a much wider pot to fund the FSCS. Financial services firms are all interdependent on each other, and it doesn’t make sense to me if one adviser collapses all the other advisers should necessarily have to step in.”
Pinsent Masons senior associate Michael Ruck said reviewing the way funding classes were compiled and having a wider funding base would help to lower firms’ individual FSCS bills.
He said: “I agree with Tim in that the way some of the pots are divided and firms are allocated to the funding classes doesn’t always make sense. It sometimes leads to certain pots being more likely to have failures within them and firms in those groups more likely to repeatedly having to pay out.
“If you spread the contributions beyond a set number of pots, the levies on the many would be reduced as a result.”