The new £150m Financial Services Compensation Scheme annual claims limit will wipe out around 30 per cent of advisers’ profits if the limit is breached, according to the FSA.
In its latest consultation paper to review the FSCS funding model, following a consultation last July, the FSA today confirmed plans to increase the annual claims limit paid by investment advisers from £100m to £150m with effect from April.
Last July, the regulator said it based the increase to the claims threshold on what advisers could afford, saying reaching the new £150m limit would equate to 25 per cent of advisers’ profits.
The Association of Professional Financial Advisers argued the FSA had failed to properly account for the impact on adviser revenues of the weak economy, the impact of the RDR and falling adviser numbers.
Apfa calculated a 10 per cent drop in revenue would mean the current £100m FSCS limit would take up 25 per cent of firms’ profits, which would rise to 40 per cent if the limit was raised to £150m.
In its consultation today, the FSA says it has since carried out some remodelling which suggests 30 per cent of advisers’ profits would go towards FSCS claims if the £150m limit was reached.
Speaking to Money Marketing following today’s consultation, FSA director of conduct policy Sheila Nicoll says: “We did take account of the RDR in the modelling we did, but we did use very conservative estimates within that modelling. As a result of the representations made to us, including from the likes of Apfa, we did look again at the numbers but do still believe our calculations were valid.
“What we would also say is we have committed to keeping the levels under review. We are not saying there would not be some losses [of adviser firms] as a result of the threshold being reached.”
Many in the industry have advocated moving to a pre-funded method of FSCS funding, perhaps through a product levy. The FSA has consistently maintained it is not within its power to introduce a pre-funded system, saying this is a matter for the Government.
Asked whether the FSA has approached the Government about introducing a pre-funded FSCS, Nicoll says: “The Treasury has been aware of these discussions and debates all along. And I am sure the industry itself will have been talking to the Government on this. We are not a lobbyist.”
The FSA has decided to reconsult on its idea for a Financial Conduct Authority retail pool that would be called upon if one class breaches its annual limit. The system as first proposed would scrap the current provider cross-subsidy when an intermediation class reaches its limit. Following industry opposition the FSA is opening a month long consultation on a new proposal which would see all providers make contributions when the pool is triggered by the failure of an adviser. This would include contributions from banks, insurers and mortgage lenders.
Nicoll says: “The important point is we have listened to the consultation feedback, and we would very much like to hear the industry’s response to this further consultation.”
Pressed on why the FSA did not listen to feedback opposing the increase to the annual claims limit, Nicoll says: “Even when we do not change something that is not to say we have not listened. We appreciate this was always going to be a balancing act. We are very conscious that these circumstances require very fine judgements to be made and require a workable solution.”