Aifa has written to the Chancellor asking him to change his plans for FSA fines to be diverted into the Treasury’s coffers and instead use the money raised to help fund the Financial Services Compensation Scheme.
Last month, George Osborne announced he intends to table and amendment to the Financial Services Bill so that fines collected by the regulator no longer go towards reducing levies for other firms.
On Tuesday, Aifa chairman Lord Deben wrote to the Chancellor asking him to put the money towards funding the FSCS.
The letter says: “Using the money in this way would ensure the money directly benefited the consumers of financial service firms.”
The next morning, Treasury sources said the Chancellor intends to stick with his plan for the money to go into the public purse.
Osborne told the House of Commons earlier this month that the move would apply to fines handed down by the regulator since April, including the £59.5m penalty Barclays were slapped with after admitting some of its traders rigged the Libor rate.
The FSA is currently reviewing the funding of the FSCS, though the process has been held up by delays in Europe over the finalisation of the Deposit Guarantee Scheme and Investor Compensation Scheme Directives. In April, the regulator said it may push ahead with the review without finalisation of the rules and a consultation document is expected in the coming weeks.
One of the options under consideration as part of the European review of the ICSD is a prefunded scheme. The letter says Aifa believes this approach has “many advantages” but warns it will mean a period where firms will be paying towards the establishment of the prefunded scheme as well as the current “pay-as-you-go” model.
The letter says: “The IFA sector is already struggling with compensation and regulatory fees, any increase will further reduce the viability of independent financial advice in the UK. The fines could be used to establish the prefund, mitigating the burden on firms and help to ensure the secure compensation arrangements and a strong health sector.”
A prefunded scheme is unlikely to be proposed in the consultation as the Treasury has concerns over the moral hazard it would introduce.
Currently, when a firm in one FSA fee block is fined, the relevant enforcement action has been funded by the fee block. Part of the fine is used to top up that block’s funding to take account of the money spent on the enforcement action. The rest of the fine proceeds are used to reduce future levies across all fee blocks by an equal amount. The £38.6m levied in 2012/13 on the fee block affecting most advisers would have been 21.7 per cent higher without fines from the previous year being redistributed.
Ashley Law director Jock Cassidy says: “I am a Conservative but this Government has become arrogant and it is a bit daunting the speed with which this was rejected.”