Aifa has called for a professional advice sub-class to form part of future reform of the Financial Services Compensation Scheme.
Aifa and the British Insurance Brokers Association gave evidence last week at an All Party Parliamentary Group on insurance and financial services session on the FSCS.
Aifa policy director Andrew Strange said a professional advice sub-class could be set up to differentiate professional advice firms from the likes of stockbrokers, firms where intermediation is a secondary activity or firms that are not meeting professional regulatory requirements.
Strange said the FSCS system operating in the UK cannot be taken in isolation and must be placed in the context of developments in Europe.
He said: “Europe has a tripartite of silos – an existing directive on deposit guarantees, a white paper on insurance guarantee schemes and there are tabled amendments to the investor compensation scheme directive.
“None of these schemes include the act of intermediation in its own right, with Europe preferring the caveat emptor approach to advice.
“While Aifa believes that cognisance of and engagement in the European agenda is vital, we do not propose removing the consumer protections afforded to people today in the UK.
“However, as part of the wider debate and review of the compensation scheme, it is interesting to question whe-ther a fourth silo should be created – where like-for-like professional advisory firms can be recognised and support each other.”
Aifa will publish a discussion paper on FSCS reform later this month.
It is sceptical as to whether a pre-funded model of the compensation scheme would deliver benefits.
It estimates the transition cost to a pre-funded model, where advisers would still be paying FSCS contributions on top of pre-funding costs, would mean an equivalent levy of £100m a year for the investment intermediation class for the next five years.
Aifa supports the idea previously put forward by the FSA where existing regulatory capital could be held on account when a firm leaves the market. This would be returned to the firm after a set period if no claims arise during that time.
Strange says Aifa would welcome further debate on funding the FSCS via a product levy.
He says: “At a time when consumer transparency of both cost of product and advice is at the heart of many of our regulatory interventions, a spec- ific cost built into a product holds some degree of merit and would foster an approach of consumer responsibility.”
Radcliffe & Newlands chartered financial planner Mel Kenny says: “The FSCS levy should be relative to the risk a firm undertakes and so separating professional advice from activities such as stockbroking is a fairer way forward.”