FSA: Why we rejected an FSCS product levy

FSA building 480

The FSA has set out why it believes alternatives to the current Financial Services Compensation Scheme funding model, such as a product levy, are not feasible.

The regulator has published its consultation paper on reviewing the FSCS funding model today.

It proposes an increase to the annual claims limit paid by investment intermediaries, from £100m to £150m, and the creation of a retail pool for firms under the Financial Conduct Authority which would be triggered if any class breaches its annual claims limit. Deloitte research commissioned by the FSA suggests 118 firms in the investment intermediation class would become unprofitable if the new threshold was reached.

Many in the industry have argued a product levy would be transparent for consumers, make them aware of the cost of compensation cover, and shield firms from unpredictable levies.

But the FSA argues a product levy would not take into account the different risks posed by different products and transactions.

The FSA says: “A product levy makes no differentiation between the activities of provision and intermediation, even though a significant volume of FSCS claims relate to advice by intermediaries.

“Intermediaries would appear to play no role in the funding of the FSCS as the levy would be attached to the product and therefore the provider.”

Another suggestion proposed by the industry was division within the existing classes, to isolate firms from riskier areas within its class.

But the regulator says this could compromise the sustainability of each class as a smaller number of firms within each category means each firm faces a larger share of the costs.

The FSA says whether the FSCS should be pre-funded or not is a matter for the Government.

The number of complaints, and the number of complaints upheld by the Financial Ombudsman Service was rejected as alternative way of calculating levies as the FSA says this is an “unreliable indicator”.

Firms’ risk scores, which the FSA uses to prioritise its resources, were deemed an unsuitable method for calculating levies as risks are measured based on FSA objectives rather than risk of a compensation claim.

The FSA says calculating levies according to products sold would also be problematic, as risk would have to be continually assessed over the product’s life cycle. It also does not factor in whether the product is suitable for a particular type of consumer.

The FSA says: “We are not making any changes to the current tariff measures, because we are unconvinced of the merits of alternatives such as product levies, and have not been able to identify feasible or reliable metrics in the intermediation classes to reflect how likely a firm is to give rise to claims on the FSCS.”

The regulator says alternative methods of allocating levies such as a greater number of classes would mean firms are more likely to face unpredictable levies.

It adds: “We consider the burden on firms is likely to be less under our current approach than under any of the alternatives proposed.”

Aifa policy director Chris Hannant says: “It is unclear how these limited reforms will correct these issues and we are disappointed the FSA has not gone further in its review of the funding arrangements. Options such as pre-funding have seemingly been rejected without being subject to public consultation. 

“We willl be seeking to reverse the proposed increase in the threshold for the investment intermediation class which will be a further blow for advisers who are struggling under the cost of regulation.”

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Comments

There are 8 comments at the moment, we would love to hear your opinion too.

  1. Ive only quickly read the relevant chapter 7 section this morning, but I urge all IFAS to respond and point out to the FSA why their thinking on this is wrong, which I will definitely be doing in depth.
    3 fast initial observations:
    Firstly, to state that they arent doing it because”its difficult” is surely an invalid reason? Much of what they do is Im sure difficult but it still needs doing if its important enough.
    Secondly, I think theyve misunderstood the concept of a “product” levy. Product in FSCS context would include “advice” and so you can quite easily have a levy attached (added on for clients to pay) especially post RDR of course, and its therefore very visible to consumer who ultimately pays for eveything anwyay and it means you make sure polluter firms are paying in advance of their failure (a BIG step forward).
    Finally, it would NOT be overly complex to risk rate all the various “products” to determine the risk premium to be applied. In fact, doing it could have massive benefits, meaning that “products” that dont submit for categorisation (and hence are exluded) would presumably be unsuitable for the majority, and for those products which are rated it adds valuable information for both IFAs and clients. And it doesnt need to be accurate to the penny in terms of whos paying what they ought to be, after all the current system doesnt do that at all.
    Getting ALL businesses to contribute means lower overall bills for all compared to now, where the failed firms have failed without paying of course. Plus its more likely to be able to cope with large disasters if the calcualtions are done right. Plus this new prefunded levy pot could be used to buy a newly created category of Govt debt bringing massive benefits to the country as well.
    I urge everyone to feedback on the paper to bring some weight to this.

  2. The unelected, unaccountable,incompetent, FSA has without consultation, decided.End of.
    The reason everything falls on the intermediaries is that the FSA, no matter the cause, blame & claim the IFA.

  3. So lets keep FSCS funding as complicated as possible, that way we keep our jobs in both the FCA and the PRA when the time comes, oh and it helps that by ring fencing product providers we will keep them as our friends. Everybody happy? who? IFA’s? who cares about them.
    What is so difficult to understand about a product levy, except its simplicity.

  4. What is adviser charging then? Simply add a levy to the charge and that is advice (intermediation covered) covered. Transparent, clear and fair.

  5. Find out how much is paid in regulatory fees and PI then put it into the pot, scrap the regulators because all we get is bigger and more damaging regulatory failures that litter the financial landscape of this once great nation, strangulation by regulation because supervision has failed.

    http://www.ifadu.co.uk/downloads/fsaburnitdown.pdf

  6. What an absolute load of testicles.

    As another correspondent has said and as I remarked to Jon Pain at an AGM – if it was easy anyone could do it.

    How they can imply that it is advisers who are the problem is a leap of logic that only these numpties can make. To ignore the FOS statistics is a grotesque distortion. Advisers are only responsible for less than 2% of complaints.

    Perhaps if they categorised firms correctly the figures might look a little different. Turning Key Data (for example) into an adviser rather than a provider was another egregious piece of misplaced logic.

    I have just reflected on the number of antipathetic comments I and others have recently made concerning the Regulator in response to the swathe of utterances that have come from the Colonnade over the past few months.

    Presumably it is their intention to go out with not a bang, but an atomic explosion of approbation and disgust from the whole of the financial services community. What a legacy! Can you imagine being an employee of the FSA and telling your grandchildren that you presided over some of the biggest cock ups in UK financial history at precisely the time when there was the biggest recession for over 100 years.

    The case for a product levy is undeniable. Who says it has to be level. It can be graded with the product. Saying that the provider pays is such nonsense. It is the consumer that pays – just as he pays SDRT, SDLT and IPT.

    This paper is just a distorting, venal attempt to justify their warped mentality. And if you think I have been a ‘bit over the top’ I have toned it down from my original draft!

  7. ken170647 YouTube 25th July 2012 at 4:17 pm

    If a product provider is in default and the FSCS applies, then the money should come from the product provider levy. IFAs are not product providers and therefore should not contribute to the FSCS for the failure of product providers. IFAs do not share in the profits of product providers. If they did commission would not be showing as “cost of advice”. If commission (or some commission – an amount equivalent to the product provider’s cost of distribution) had been deducted from profits instead of from the product then OK, IFAs should pay towards the scheme for the demise of product providers.

  8. As I sit here in my hotel room in the Caribbean, I wonder how this industry has got to this state of denial. A product levy similar to IPT is the ONLY method by which the system could become fair, transparent and workable. IF the product provider is unwilling to apply a levy to a particular product then the product becomes unavailable to be considered.

    One of my concerns as I sit here, going home in two days time, is whether the iFA sector has any clout. AIFA seem to protest to no avail, others have put their views and been ignored, exactly what was the purpose of the consultation paper if nothing is going to change?

    Loonies running the asylum never did look sensible.

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