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Aifa: The FSCS wasn’t meant to be like this

We are expecting the FSA to consult on the Financial Services Compensation Scheme’s funding model in the coming months. This will be important for IFAs as it seems to me that something has gone very wrong with FSCS funding and the onerous burden it has become for the sector.

I say something has gone wrong because it was not supposed to be this way. If you look back at the FSA’s intention when designing the current arrangements, it was very conscious of the cost the FSCS imposed on IFAs.

It said: “The concern about sustainability follows in part from the concentration of compensation costs in particular contribution groups (financial advisers). In an extreme case, this could lead to a vicious circle, with heavy levies themselves tipping more firms into default and saddling the FSCS with further compensation costs.”

This is not an extract from an Aifa representation, but taken from the FSA’s consultation document. So the intention was a benign one for IFAs,
but the current situation less so. The levy for the last couple of years has been just about at the maximum level and we might reasonably expect the next one to be of a similar level. On top of this, the FSCS has decided to pursue advisers for misselling in the Keydata case, all of which exerts significant pressure on the sector at a time of upheaval.

Obviously, the large recent claims have come from a handful of high profile firm failures with intermediary permissions that have undertaken other activities.

This begs the question, why are intermediaries paying for this? And, more important, what is the appropriate solution? Get rid of the sub-classes and have all in one pot or more stringently divide firms into more finely defined groups that reflect their activities? Should the activity that drove the losses for clients drive the determination of who pays, rather than what their permission says?

I am not going to prejudge the outcome of the debate Aifa will be having with members in the coming months but what seems clear to me is that the FSA and FSCS need to retain better sight of their stated policy aims.

In the last review, they had the rightgoals. The FSA made clear statements about the intention to produce a scheme that was fair, affordable, durable, not volatile and based on affinity of activity. I think that recent events have shown the scheme to have failed to meet these goals from an adviser perspective. This failure has been exacerbated by FSCS policy for recoveries with actions on Keydata.

It will be all the more important that when designing new structures, these goals are borne in mind and observed more generally in implementation. These should be the guiding principles for the compensation scheme review.

Chris Hannant is policy director at Aifa

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Comments

There are 6 comments at the moment, we would love to hear your opinion too.

  1. Now that cut backs are hitting everybody the FSA realise that they should have been counting pennies too.

    Just like a sinking ship the rats (who have been on a gravy train for years) have been leaving recently.

  2. We are a small, local IFA practice and don’t get involved in stuff like this. Nor would we, our clients are the mass affluent and wouldn’t want us to direct them to the more esoteric end of the ‘investment’ spectrum. But each year we pay for the failings of those who chase the dream, those who feel they are possessors of that nugget of knowledge that makes them better than everyone else, those that chase the silver bullet. Yes I would like our business to be bracketed with those that don’t do film partnerships, SCARPS, split-caps, STEP’s and all the others magic money making schemes and maybe I wouldn’t have to pay for the hubris of others.

  3. Stevo, the problem is that it doesn’t matter what you advise on or what category of client you advise, the problem lies with the fact that contrary to common law the FSA can all of a sudden retrospectively decide that based upon today’s information and the benefit of hindsight, you were wrong 5 years ago and the FSCS can then decide that all IFAs have to pay for it! It’s the only way they can keep the merry-go-round turning whilst covering their backsides.

    If you get involved in onshore/offshore investment bonds and/or Wraps/Platforms get ready for the next round of having to defend yourselves against spurious claims of negligence and inadequate due diligence, all in the name of FSCS funding and FSA backside covering !!

  4. A good article.
    And surely the one solution to ALL their quoted aims …”……fair, affordable, durable, not volatile and based on affinity of activity” is something pre funded?
    FAIR – unless the payment (for protection) is paid when transacting the business, how can it be fair? The current system sees good firms paying for bad…clearly NOT fair. Safer products or advice end up having to pay for dangerous or riskier ones that fail. NOT FAIR!
    AFFORDABLE – prefunding means you know the cost and pay it when a transaction goes through – this is ultimately affordable compared to current system which creates unknowns and “out of the blue” levies
    DURABLE – current system with larger levies on dwindling numbers is self evidently not durable. And the current system could NOT cope with a seriously LARGE event (e.g. witness govt bail out of banks). Pooled prefunding means you have the money already set aside for most eventualities and even if its not enough, additional “surprise” levies after the event will be far lower than now and/or govt bailout will be far lower
    NOT VOLATILE – prefunded product levies are exactly that, they are paid when transaction goes through, smooth, low impact on all parties to the transaction and non contentious.
    AFFINITY OF ACTIVITY – what could have more affinity with the activity than the product levy that is paid when the product or advice is transacted.
    All “products” get assessed as part of their initial regulation to determine their product rate – which in itself is helpful info for advisers and clients – and the “rate” is then deducted when products are purchased. OR, products DONT qualify at all and are UNREGULATED and outside the protection system – again useful info and removes the “dodgy” products removing the burden on the scheme massively.
    Advisers could pay a separate rate based on their advice earnings on various products, and if eg they advise on an UNREGULATED product, then they should pay a much higher rate to reflect this (but not be prevented from doing it!)
    Also, you could issue special new govt debt instruments for this prefunded fund to invest in, might solve govt borrowing problems at a stroke

  5. The problem seems to be that we as an industry cause 1/2 billion pounds of detriment according to a certain well known soon to be unemployed chief exec tells us. The cost of funding the FSA is approx 1/2 billion a year…… You see where I am going with this? It doesnt take rocket science. Make the Govt responsible for statutory regulation and the country pays for it. This would then provide for UK law to once again be returned to the govoners chair and get rid of a lot of retrospective legislation costs. The money that was being used to fund FSA could be used to pre fund FSCS for a year then then reduce this to 20% of that figure as a levy split equally across the entire industry. Everyone is a winner and we would have some kind of sense of morality returned to the business and we can all get on with doing what we are all respectively paid to do.

  6. When originally designing it, the FSA may well have been rightly conscious of the potentially excessive cost burden that the FSCS might impose on IFA’s. But clearly that line of thinking has changed.

    Some perniciously minded miscreant within the FSA obviously realised that the FSCS can be used not just as a scheme to protect investors but also as a handy piece of heavy artillery in its Grand Plan of extermination against small IFA’s.

    Bury ’em in so much red tape that it’s almost impossible to transact business profitably, add to that a never ending succession of hindsight reviews and then break ’em financially with an endless succession of additional FSCS levies by classifying every failed provider as an intermediary.

    Yet Hector Sants would have us believe that the FSA has no prejudicial agenda against small IFA’s. Hands up who believes him.

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