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Calls for providers to fund FSCS as review continues

Ken-Davy-700.jpgSimplybiz Group chairman Ken Davy has said product providers should be the primary funding source for the Financial Services Compensation Scheme in the event a product levy is definitely ruled out.

In a paper sent to the FCA’s FSCS review team, Davy outlines why he thinks the current FSCS funding model is flawed.

The Financial Advice Market Review recommended that the FCA’s ongoing review of FSCS funding should explore risk-based levies, reforming the FSCS funding classes, and more extensive use of the FSCS’s credit facility.

A product-based levy was deemed out of scope of the FCA review as it would require a change in legislation, but has not been ruled out entirely.

Davy says a product levy would be the fairest funding model.

However, he adds: “On the assumption that a product levy is rejected, we believe it is essential that product providers become the primary funding source of the FSCS where its impact on any individual provider would be insignificant.”

He adds: “Very importantly, placing the levy on the product providers would give them an immediate and continuing vested interest in the quality and integrity of the firms from whom they accepted business. This is an important element of the regulatory framework which has been missing for far too long and will be a further significant benefit of a revised funding method of the FSCS.”

Davy says advisers should also contribute to the levy because the sector gets some benefit from the FSCS. He suggests advisers could contribute 10 per cent of the total amount being raised.

He comments: “I believe that radical reform of the FSCS is critically important to the future of the advice sector and needs to be addressed for the benefit of every adviser who is operating in the market today, providing an invaluable service to their clients.”

FCA policy director David Geale has previously confirmed the regulator is looking into provider contributions and their relationship to what advisers pay.

Optima Regulatory Strategies consultant Esrar Moitra also expressed sympathy for a shift in the burden of responsibility from advisers to providers.

He says: “Implicitly, what its saying is the product design and distribution strategy of the product provider is contributing to the potential mis-selling risk of the product.

“Product providers are much more solvent than IFAs so its a transfer of some of the funding risk. The FSCS levy is in some ways very unfair to IFAs because it is a cross-subsidy between those that are healthy and those that are less healthy.”

Money Marketing understands the FCA will release its consultation paper for FSCS funding reform next month. It is also understood that the link between the FSCS and professional indemnity insurance has also been discussed with a view to a possible follow up review of the PI market.

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Comments

There are 4 comments at the moment, we would love to hear your opinion too.

  1. The purpose of the FSCS is to compensate investors for losses arising from poor advice, which has nothing to do with providers, so why should they be required to chip in?

    Also, how will the FSCS force unregulated providers of unregulated investment schemes to pay any levy? They’ll just ignore the FSCS and there’ll be nothing the FSCS can do about it.

    I’m far from happy with the size of my FSCS levies but the root cause of the degree to which they’ve skyrocketed over the past decade is the endless FAILURE of the FCA to identify, home in on and put a stop to the practices which have resulted in the losses arising from more and more product failures being taken on by the FSCS. Of what value are the FCA’s GABRIEL Returns? Nothing whatsoever. They’re just a pointless and time wasting imposition on all honest advisers.

    Worse still, the FCA has FAILED dismally to tackle the common practice of phoenixing, which enables the guilty parties to secure reauthorisation and carry on just the same as before.
    Whatever is the point or justification for a DA process that commonly now takes at least six months if the FCA FAILS even to pick up and reject applicants with a proven history of flogging junk investments which have gone down the pan and forced the firm that sold them into default?

    The whole system stinks to high heaven and nobody at the FCA is ever held to account.

  2. If you’re going to talk about the fairness of a funding model, and then go on to say advisers could contribute 10 per cent of the total amount being raised, I’d expect to see some science behind why advisers only case 10% of the harm that FSCS seeks to redress.

    In fact, what we typically see is that people have gone into investments that they shouldn’t have touched with the proverbial bargepole, and done so because some adviser has told them it’s a good idea.

    If I suggested – just for the sake of controversial clickbait, you understand – that it would be fairer that, considering the adviser’s role, they paid 90% of the FSCS levy, can anyone come up with some good science to rebut that?

  3. That’s “… advisers only CAUSE 10% of the harm …” of course. Bah!

  4. Let’s remember that we are now unpaid introducers of liability-free business to product providers under RDR, so they absolutely should pay their share of any costs which befall us, where it is feasible to do so, if we are truly all in this together!

    Better still, take the levy from industry fines; use the proceeds of wrongdoing to fund the ‘protection’ scheme for investors, as had been said many times previously. Or is that applying too much common sense to this issue (Although it will of course mean taking away some windfall revenue from the Treasury’s coffers!)?

    The above said, I still very much applaud ANY attempts to address the injustice of the FSCS funding model.

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