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.