As the recession continues to bite, we as generous taxpayers bail out the banks. Now we find out that RBS needs even more bailout money.
Thankfully, IFAs do not currently contribute to the Financial Services Compensation Scheme towards meeting the costs of the banking crisis but if things continue as they are, this may become the case in the future.
It is pleasing to hear the FSA is about to undertake a full review of the FSCS followed by consultation. The review will include an assessment of the composition of classes and sub-classes as well as the annual thresholds each class can be asked to pay.
The FSCS is currently split into five broad classes:
- Life and pensions
- General insurance
- Home finance
All these five groups (except the deposit category) are divided into two sub-classes made up of firms that “engage in similar style of business”.
Firms in one particular group will be expected to meet the compensation claims arising from defaults in their sub-class. Once a sub-class reaches its annual threshold, the other sub-class in that broad class will be required to contribute to any further compensation costs up to the threshold for the class as a whole.
The allocation of levies among different types of firms, the limits that apply to different types of FSCS levy and the method of apportionment of levies to individual firms will also be examined.
This is an important review and I hope the outcome is that only those involved in the banking crisis have to fund compensation in the event of big banking failures, not financial advisers. Most IFAs have had a hard year, shown in the Plimsoll Industry Analysis 2010, which reports a bleak short-term future for the industry next year, with two-thirds of firms struggling. It says one in three companies will make a loss and a third will suffer financial difficulty.
I strongly believe advisers should be able to add a reasonable complaint deadline into client contracts. It happens in other industries, so why not financial services? In many cases of clients complaining about advice provided many years ago, they were fully aware of any inherent risks when they took out a financial plan. I am not advocating a few years long stop but how about 10 years as reasonable, based on the rules and regulations applicable at the time the advice was provided? I would like to see the reasoning from the FSA if this is not the findings of the FSCS review.
The current situation pushes some advisory firms’ PI premiums so high that it is difficult to pay the invoice in these economic times. Who can say it makes sense that advisers’ PI needs to run until the adviser’s death? It is difficult enough to keep all the evidence of an advised sale with the basis of all recommendation with the applicable rules of that time just in case a complaint arises.
Please add your thoughts to this FSCS consultation when it arrives on your desk or things may became even more difficult for IFAs if their FSCS levy starts to include the cost of bailing out the banks.
Kim North is director of Technology & Technical