The Financial Services Compensation Scheme has announced it intends to levy £240m on life and pensions intermediaries this year, of which financial advisers will pay £175m.
The levy follows comments made by the lifeboat fund’s outgoing chief executive, Mark Neale, that pension transfers and high-risk advice on Sipps were putting increased pressure on the scheme.
In its 2019 budget published this morning, the FSCS determined the levy on the life and pensions intermediation class, largely made up of advice firms, should be set at £240m.
Providers will contribute £65m towards those fees under new rules revealed last May.
The FSCS says: “[We] continue to receive significant numbers of claims against independent financial advisers regarding advice given to customers to transfer existing pension arrangements into Sipps. The vast majority of these claims relate to advice to invest pension monies into high-risk, non-standard asset classes within a Sipp wrapper.”
Chairman Marshall Bailey reiterated that bad behaviour from firms will keep driving costs up with the risky nature of many investments keeping uphold rates for claimants high.
He says: “Our shadow also extends across the industry itself in the shape of compensation costs, which have risen over recent years – meaning we’ve had to share them across a wider number of firms.
“How much better if stability and confidence were also underpinned by lower rates of firm failure, with FSCS there as a last resort?”
Defined benefit transfers have faced significant scrutiny from both the FSCS and the FCA in the last year.
The lifeboat fund’s November outlook also pointed the finger at cases like the failure of discretionary manager Beaufort Securities, which placed a £10m dent in deficit for the general insurance funding pool last year.
An estimated total £516m in levies is predicted to hit financial services over 2019/20 compared with the £468m levied last year, covering just a nine month period.
Neale says the costs are still “broadly flat in real terms” and could be driven down if companies were more upfront about information needed to process FSCS claims.
He says: “[Pay-out] capacity rests heavily on the quality of information. We often lack, however, equivalent high-quality information when insurance companies and investment firms fail. That compromises our ability to provide prompt protection as we and insolvency practitioners reconstruct records held by brokers and finance companies.
“In particular, it can hold up our preferred approach of applying compensation to the provision of new insurance cover – so securing continuity for consumers – rather than the repayment of premiums.”
The FSCS also used its announcement to drive home its intention to crack down on phoenixing, where firms fold and set up again under a different name leaving liabilities to fall on the lifeboat fund.
The lifeboat fund says it will look to tie information on firms to external data sources to provide regulators with more detailed breakdowns of firms’ conduct.