The Financial Services Compen-sation Scheme is not perfect. This is a fact all advisers acknowledge. Increasingly, so does the regulator.
There are holes in many sides of the lifeboat: unregulated investments get the same coverage as vanilla ones; interim levies need to be raised due to volatile claim volumes; professional indemnity insurance is either too expensive or dodges the bill; there are different compensation limits on different types of product.
Many of these issues will inherently plague any compensation scheme that is set up as the FSCS is, that is, to retrospectively insure liabilities (up to a certain point) when a firm fails using pooled funding. It is absolutely inevitable that those who did not cause the collapse will pay for it, because the fallen firm physically can’t anymore.
It would be unfair on consumers to suffer as a result of negligent advice, so the case for a compensation fund to exist in some form or other is pretty unimpeachable. And while any reform suggestion cannot help but produce both winners and losers, we do need to make the best of the imperfect situation. This is what the FCA laid the groundwork for last month with some new rules for the FSCS, and some proposals for the market to feed back on. Some quick wins have been found, which must be applauded.
Merging the pensions and investment advice funding classes, for example, is eminently sensible to reduce administration costs. As is making sure PI can’t sidestep payouts once the FSCS is involved – even if the FCA did shy away from more fundamental PI reform for fear it would cripple the market.
Advisers may baulk at having to enter more data in Gabriel with a new section on risky investment sales, but if this leads to a system closer aligned to polluter pays, then this should also be welcomed.
More fundamental reform than proposed in the most recent consultation, such as a risk-based levy, may well happen. FSCS chief executive Mark Neale makes no secret that he is sympathetic to the idea, and the FCA certainly wants it in principle. But this just proves how impossible it is to deliver that silver bullet. Even adviser trade bodies disagree over risk-based levies: Apfa (now Pimfa) is pro, Libertatem is against.
Whatever the result of the review, it is good to see that it has really struck a chord with advisers. The original consultation received an impressive 230 responses, a great many of them from financial advice businesses, both household names and smaller regional firms. Advisers must now respond again to get the best deal they can.