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Compensation change may see IFA levies soar

IFAs could face a “nightmare scenario” if the FSA goes ahead with plans to stop making providers subsidise IFAs on the Financial Service Compensation Scheme.

In consultation paper 86, Financial Service Compensation Scheme Draft Rules, the regulator has floated the idea of removing the compulsion for providers to cross-subsidise the costs that IFAs face under the scheme.

The withdrawal of support could drive many smaller IFAs out of business as they would be unable to meet the increased annual levy to the scheme. Currently, IFAs face fees of £790 a year per firm and £320 a year per RI.

The FSA says there may not be a need to include the obligation in its rulebook but providers may continue funding voluntarily. It stresses it is a proposal and consultation does not end until June.

The requirement came about as a way to help smaller IFA firms meet the fees for the scheme – formerly known as the Investors&#39 Compensation Scheme.

CP 86 says: “We wonder whether it is essential for the success of the arrangement for it to be included within the funding rules, and therefore as a rules obligation on the firms concerned.”

LIA director of public affairs John Ellis says: “It is bound to be bad news for the IFA. Their compensation bills will rise as a result. The question is whether providers wish to ensure their distribution channel continues. It would be a nightmare scenario for IFAs if this were to occur.”

Aifa director general Paul Smee says: “A lot of the benefit has not gone just to the distributor but also the provider. I would very much hope they would continue to do so. I think there is a very good case for cross-subsidisation to continue.”

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