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