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FSCS campaign: Time for Hoban to do a bit more thinking

The fact Informed Choice’s Financial Services Compensation Scheme campaign managed to amass over 1400 signatures in one day once again shows the strength of feeling over the current broken model.

One extraordinary levy, to fund a one-off event, advisers could handle but the recent £60m interim levy signalled the third successive year that the FSCS intermediation sub-class has been asked to pay a levy approaching or reaching the scheme’s limit for “intermediaries” of £100m.

Looking ahead it is more than likely that these type of levies will become the new normal.

Take three front pages articles in Money Marketing from the last couple of months:

12,000 Pritchard clients warned over cash asset shortfall

Investors face £60m loss after property firm liquidation

SFO swoops on bio-fuel firms in £32m collapse

All three are likely to have consequences for the amount of money advisers and their clients will have to pay in future levies. There are bound to be other scandals bubbling under the surface across the huge range of diverse firms which make up the FSCS’s definition of an intermediary.

After a number of delays the FSA has committed to reviewing the FSCS funding model this year, although the almost comical Catch-22 European deadlock over compensation directives may lead to further set-backs.

Arguments for fundamental reform of the current model will only be won if framed from a consumer perspective.

At present the clients of IFAs are subsidising and bailing out other riskier areas of the market. There are over 6,000 firms including penny share stockbrokers, spread-betting firms, geared Tep providers, platforms and esoteric and mainstream investment firms who share the same FSCS funding bucket as IFAs.

One obvious policy suggestion would be a better differentiation of the compensation funding silos to separate IFAs and their clients from riskier areas of the market.

Taking the last few eye-watering levies as an example, the removal of stockbrokers and broker-dealers (Pacific Continental, Square Mile Securities and MF Global) structured product/life settlement providers (Keydata) and fund providers (Arch cru) would have lead to a very different set of adviser levies being charged.

Advisers and their clients would still be stumping up for failures in the IFA sector- A20 and Clarkson Hill for example- but the sums required are likely to be much lower.

Under such reform there would still have to be an “overflow” mechanism in place to ensure one of the smaller sectors is not destroyed by a huge event within their sub-class (for instance a large IFA network going bust).

Another approach would be to consider more radical reform and introduce an upfront product levy based around the risk of the product.

FSCS chief executive Mark Neale set out his arguments last year against such a policy, suggesting it would be a tax on consumers.

But this view fails to appreciate the fact that consumers are already paying these FSCS costs through advice and product charges that inevitably have to be passed down to them. At present, this creates an opaque funding model where mainstream investment clients are cross-subsidising clients that choose to invest through riskier propositions.

Would it not be fairer, cleaner and more transparent to end this system and introduce a small product levy, paid when the product is bought, with the size of the levy dependent on product risk? Levies would be put in a pot to fund future compensation costs.

Consumers would appreciate that the guarantee offered by the FSCS has a value and will no longer be forced to pick up the bill for risky areas of the market they are not involved in.

A product levy could not be introduced overnight, but pre-funding is on the European agenda and could be introduced gradually to build up a sufficient pot. Such a system would require policymakers to make the right calls on assessing market risk- but a quick look at the big compensation costs over the last few years would be a good starting point.

The other obvious issue is ensuring a regulatory structure exists to stop the type of behaviour which is causing so much consumer detriment. In a number of failures quoted above there are questions to be asked over the governance and regulation of the failed companies. The FSA this week confirmed it was pushing ahead with plans to ban the marketing of traded life settlement products to retail clients. A number of recent FSA fines, and a couple of headlines above, have involved unregulated schemes and the regulator is conducting a wider Ucis review which may lead to further restrictions.

Speaking recently in Parliament, Treasury financial secretary Mark Hoban suggested he had tried and failed to think of a better way funding the FSCS. I’ve listed a couple of possible solutions above and I’m sure the 1,421 advisers who signed up to yesterday’s petition can come up with more ideas to ensure their clients are not continually forced to pay for the failures of others. Perhaps Mark will then have another think?

Paul McMillan is editor of Money Marketing- follow him on twitter here



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There are 18 comments at the moment, we would love to hear your opinion too.

  1. The FSCS “fun” hasn’t even started yet.

    There are numerous large IFA networks operating unsustainable business models right now which will collapse post 01/01/2013. Those firms will be in our sector and it will be our resposibility to bail them out under the current system.

    Eventually, the “good” intermediaries will run out of money through bailing out the “bad” intermediaries.

    Then what ?

  2. Derek Bradley ceo 26th April 2012 at 1:00 pm

    Along with the petition, a very reasoned and constructive editorial- as always. But sadly I fear Mark will not have another think as any constructive change of direction will be seen as loss of face.

  3. Hoban is part of the FSA’s prejudicial agenda against small IFA’s, so the prospects of him rethinking and revising his position on anything are remote in the extreme.

  4. Mark Hoban and ‘thinking’ are not normally words which I would associate with each other!

  5. No, asking Hoban The Arrogant Airhead to do some more ‘thinking’ is bad news. We’ve already seen what happens when Hector Sants’s love-child gets his one brain cell working.

  6. Anonymous | 26 Apr 2012 12:56 pm

    You’ve hit the nail on the head. The FSCS is classic socialism. Socialism fails when it runs out of other people’s money.

    That’s why nobody can work out how to make the FSCS work — the socialist principles on which it is built can NEVER WORK.

  7. Hoban has in his lacklustre words;’tried and failed to think of a better way of funding the FSCS’

    Well he didn’t try very hard did he?

    The man is a waste of tax payers’ money as a minister and devalues the role. The Downing street cat could have done a better job, and all for a couple of tins of cat food per day rather than £160k/yr.
    Similar traits too;
    loafing about doing very little;
    occasionally turning out for a photo session;
    not much between the ears.

    The man’s a joke.

    Apart from that, I’m sure he’s a very nice man.

  8. Hoban is an idiot its no use expecting anything from him!

  9. Why is this article highlighting Arck property firm collapse as potentially costing FSCS? None of the arrangements from this firm will be covered FSCS.

    Old dog, you are being a little bit unfair on the Downing Street cat!

  10. I believe it may have been Albert Einstein who said something along the lines of ‘the really hard/heavy work is thinking, thats why so few do it’.
    Perhaps this is the answer why we have had the problems of the last few years and why we are in the current mess.

  11. @ Paul Nash – my initial thoughts exactly but to be fair he does seem to think, about his own personal future and what he can milk and network through his current position. At this rate he and his ilk are going to be unemployed in a couple of years and he seems to have firmly nailed himself to Hector’s coat tails. Nose, bottom and general heads up it before they even started…..
    @ Larry – yep, good old socialism. The 70 year experiment in the USSR proved that it only became competent at murder, genocide, spying, silencing critics and helping those at the top get richer. Sound familiar?
    @ Old Dog – have to disagree on one point, I don’t think he is even a very nice man!

  12. Perhaps they don’t give a monkeys where the money comes from as long as they get it?

  13. Mark Hoban didn’t think and he certainly failed.

  14. Instead of kicking Hoban like a group of delinquent schoolchildren, wouldn’t your energies be better used in analysing the basic problem and then flooding the media with practical suggestions.
    For example the FSCS is acting like a PI insurer but after the fact, and charging after the fact. More importantly it is not risk assessing the products it is “insuring” which has to be the most bizarre process ever imagined.
    This has nothing to do with concepts of socialism or any other form of State underpin because the State is not underpinning – YOU ARE.
    By the very fact of working in the industry you are condoning an insurance practice that is insane.
    Yet you have no control over the products. You have little enough control over the channels of distribution because you have never given a thought to the process, other than to belly ache, after the fact.
    You may well believe that Hoban is a self serving politician (I couldn’t possibly comment) but do remember that the FSCS has been in place for a number of years, without a lot of opposition.
    You may well believe that the people you paid to represent you were self serving “politicians” (I couldn’t possibly comment) and fell down on the job.
    There are a couple of organisations that are trying to represent the adviser community. Give them ideas. Give them your analytical thoughts. They can’t do it all on their own. But there is little doubt that without a concerted, intelligent and loud response your lives will not be worth living in a few years time.
    There is absolutely no incentive at the present time for providers to conduct their business in a practical and ethical manner and a significant part of the blame rests with advisers who are willing to sell anything – no questions asked. Forget about the FSA regulating them – they have only just heard about the Titanic. Quality advisers should be looking at a better way of protecting themselves.

  15. Where have you been all these years Glen?

    We have tried all the things you say and more. Nobody is listening especailly those at the top, so we have ended up “ranting”, its all thats left!

  16. The FSA should simply determine which products and services are covered by the FSCS and which are not. For example, stockbrokers should be outside of the scheme – their own association (if there is one) and their PI insurance should be picking up the tab in the event of failure.

    Clients should be made to sign a FSCS disclaimer when entering into esoteric schemes which by any analysis are NOT mainstream,

    It is totally immoral that ‘ordinary’ investors should be indirectly picking up the tab for people (often the greedy and wealthy) engaging with shady companies operating only just inside the law.

  17. So, if one extrapolates the thinking forward that the FSCS is akin to the socialist type failure then the only answer is for all IFAs and IFA networks to blanket refuse to pay it.

    If the CEOs of the major networks haven’t got the gumption to say NO, then we are in a meltdown scenario, as this, coupled with the probable disaster the RDR is turning out to be will be the nail in the coffin of transactional based IFA services and I can see no future for the iFA sector if this injustice carries on. Some high end firms who only deal with the wealthy may survive, but the middle ground will disappear into a black hole.

    Why the blazes should IFAs pay for a spread betting firm failure.?

    They aren’t authorised and regulated intermediaries who sell retail investment products, they are a gambling firm.

    Those who deliberately gamble are not entitled to our protection.

    Message to Mark Hoban, stop this nonsense get off your backside and do something worthwhile before the iFA sector collapses under the unjust burdens placed upon it.

    KIS ltd were put into administration by the FSA, their assets still exist, yet firms who advised on them are being threatened with action in the courts, for mis selling which is totally illegal.

    What are we coming too ?

    We must all write into the FSA, Hoban and of course our esteemed chancellor who allows this daft system to be perpetuated. 40,000 letters from advisers (paying first class post of 60p) should just about do it.

    Trouble is, this will never happen, too much complacency at the top and too little power at the bottom.

  18. Larry in London 30th April 2012 at 4:19 pm

    @Glen McKeown | 26 Apr 2012 9:48 pm

    Socialism is the people getting a few crumbs of what is rightfully theirs after the state has previously confiscated it.

    This has everything to do with socialism. The FCS doesn’t work because nothing works under socialism.

    🙂 or should that be 🙁


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