A product levy could be the fair way for the FSCS

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.