That nice Paul Rich from the FSA (and I mean that most sincerely, I really do) has invited us to come up with ideas for alternatives to the Financial Services Compensation Scheme. Certainly, the sudden change in attitude by some providers towards the cross-subsidy, with the welcome exception of Clerical Medical, requires us to go in for some urgent rethinking.
I am not a great fan of cross-subsidies but I do believe that the FSCS arrangements could continue to be justified into the future. After all, providers supplied the products which form the basis for claims on the FSCS and in some instances they are still drawing management charges on them. I do not see why they should not contribute to the fallout when things go wrong.
Indeed, one idea would be for the FSA to delineate much more clearly where liability falls between provider, distributor and consumer. If products are incorrectly designed or misleadingly marketed, it is not enough for the providers to state that there was an intermediary in the chain and that the buck stops there. Yet that seems to be where we are at present.
Of course, advisers should be expected to understand the complexities of products and their risks more accurately than the consumer. But they also need the assurance that they are being given the whole story in product literature, on the basis of which they can form their recommendations. Is this happening and, if it isn't, what role is the FSA taking?
If there is no provider support for the FSCS, what happens next? Ken Davy, our sector's elder statesman, has resurrected the idea of a product levy. Obviously, we need to work through this idea but it should not be seen as a self-evident solution or costless quick fix. In particular, we need to have a clear idea of what we are actually looking for and how it would work. There should be no automatic assumption that any levy would simply be applied across all products distributed by all channels. Would the banks accept that products on which their staff had advised should carry the same levy? Would the direct salesforces? We would not want the existence of a levy to put IFAs at a competitive disadvantage.
We also have to work out how the levy would be calculated, applied, reviewed and explained to consumers. Would it be applied at a flat rate or pro rata? Would the same method of calculation be used for single-premium contracts as for regular premiums? It all has to be worked through to deliver a credible and coherent response to the FSA challenge.
There lurk even more difficult questions. Is it too easy to enter the adviser market and exit it, leaving behind claims? Would higher capital requirements help keep FSCS costs down? Or would this possible cure be worse than the disease? How can purchasers of IFA businesses be better informed about potential liabilities so they do not find themselves with claims which threaten their businesses?
When regulators offer challenges, it is usually because they cannot see any easy answers. No change here, then.
Paul Smee is director general of Aifa