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:
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