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FSCS chief invites suggestions for ‘fairer’ funding model

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Financial Services Compensation Scheme chief executive Mark Neale has invited firms to submit suggestions for “fairer” alternatives to the lifeboat scheme’s funding model.

In his latest blog post on the FSCS website, Neale says he recently received a call from an IFA who expressed “anger” that he was having to fund the rising cost of Sipp claims despite not being authorised to advise on long-term insurance products.

In April, the FSCS announced that the 2015/16 levy for life and pensions intermediaries would almost double from an expected £57m to £100m.

The news came after life and pensions advisers were hit with a £20m interim levy in March.

Neale says: “Other comment was more restrained, but reflected the same frustration that businesses with low risk business models were, as they saw it, bailing out much riskier firms. The ‘blameless’ were picking up the bill for the blameworthy.

“I understand this frustration and it concerns me. Industry support for FSCS is put at risk if there is a perception that our funding arrangements are unfair.”

He says alternative means of distributing the FSCS’s costs include fragmenting the existing funding classes to reflect firms’ different business models.

But he says: “We have previously concluded that the FSCS’ funding – and security for consumers – is better secured by pooling costs across wider, deeper pools. Narrow, shallow pools are much more vulnerable to big failures.”

Neale says: “A more promising approach may be to retain the current classes, but adjust the underlying levy base to reflect risk.”

Currently, the levy base reflects firms’ share of the relevant business.

Neale says that to change it, the FSCS would need to find “objective and transparent” measures of risk which genuinely correlate to the risk of firms’ failing and claims against them falling on the FSCS.

He says: “This is where firms themselves – and their trade bodies – can play an important part. If you think the principle of risk-based levies is right, please help the regulators and FSCS to identify fair ways of capturing risk in the allocation of levies.

“You can help us to shape a better funding system if you get involved.

“This is, moreover, the right time to do it because the FSCS’ funding review, led the by the regulators, is about to get under way.

“So if you think the current arrangements are unfair, please tell us what would be fairer.”

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Comments

There are 11 comments at the moment, we would love to hear your opinion too.

  1. For Christ’s sake, Mark is not difficult, Industry Levy, policy/ product/ fund levy, and redistribution of fine money (don’t let the treasury have it).
    Personally I don’t begrudge paying my fair share, but its unacceptable that the treasury walks off with over 1.4 billion and broken funds and products get away scott free.

  2. @ DH – Id go one step further. Make it a voluntary product levy. If the client takes it they have the protection, if they don’t want to pay for it, they get nothing.

  3. Trevor Harrington 3rd June 2015 at 2:10 pm

    D’accord – C’est ca

  4. Steven Pearman 3rd June 2015 at 2:54 pm

    This slayed me.

    ““I understand this frustration and it concerns me. Industry support for FSCS is put at risk if there is a perception that our funding arrangements are unfair.””

    How can anyone rationalise that the current arrangements are anything other than scandalous and an abuse of power.

  5. Derek Bradley 3rd June 2015 at 2:55 pm

    The levy can cause considerable distress to small firms as the sums are often large, unpredictable in amount, timing and require immediate payment.

    While all this is going on, £1.37bn in fines was’skimmed off’ to the Treasury and being used, assuming we actually believe the Government spin, for ‘good causes’.

    To quote former US President (George Washington) “It is better to offer no excuse than a bad one.”

    This use of fines is unfair, immoral and must stop.

    The biggest obstacle to consumers getting easy access to independent financial advice is cost.

    The biggest costs to financial services firms after salaries are for regulation.

    Surely it does not take too much cerebral activity to calculate that with the FCA 2014 costs of £264m plus the FSCS budget of £313m, fines exceed regulatory costs by £894,431,800.

    This should mean that offsetting fines against the cost of regulation and compensation levies could have given the industry ‘good guys’ a free ride for over 2 years and those hard pressed ‘consumers’ or “low end savers” as Mark Garnier MP calls them, access to financial advice at a very much reduced cost as they can benefit too from the reduction in the regulatory cost burden.

    Dare I suggest that these fines could have even funded the FSCS based upon the current budget for at least 4 years, again reducing costs for consumers?

    The Treasury is treating the financial services industry as a ‘milking cow’. The cost of demonstrably reprehensible bad behaviour, mostly by banks, should benefit the good guys ultimately reaching their clients, the great British consumer.

    Henry Ford famously said, “it is not the employer who pays the wages, they only handle the money. It is the customers who pays the wages”.

    And in the world of financial services it is ultimately the consumer who pays the bill for increasing fees by increased advice and product charges.

    Food for thought Mr Neale?

  6. Product levy has to be the way, but for heavens sake let’s not get bogged down with a different levy for each product depending on the perceived risk, products often seen as low risk have produced big claims as well, a few pence for every product sold, or a minimal percentage of premium to reflect the size would be enough and nobody would notice it. My old sales manager used to say KISS it, Keep It Simple Stupid, and the answer here is so simple you have to be stupid not to see it.

  7. You would expect the insurance industry to develop a protection product to cover individual financial loss, the premiums based on the level of risk in the product. This would help structured products for example to have insurance against counterparty failure. For example, Investec’s latest enhanced kick-out plan offers 9.25% pa with no protection against the insolvency of the counterparty bank. If a client was offered the plan with an optional 2.0% levy to fund a protection plan so that there was no counterparty risk I’m sure many would pay the fee. For another 1.0% you could get guaranteed return of capital if the FTSE 100 Index failed the soft protection. Surely the industry itself could solve its own problem.

  8. The FSCS and FCA need to sit down in the same room at the same time with representatives from the industry. They would be left in no doubt as to the easiest and fairest way to mend this fatally broken system. Its a product levy that is clearly shown on the KFD/Illustration. Those with the levy on the KFDs are protected by it and all those who purchase financial products without it are not. Clients would value the protection afforded by the FSCS in a way that they do not understand at the moment. The same message would be reinforced with every product bought/ piece of advice given.

  9. DH – In full accord with one tweak. As far as the fine money is concerned whatever percentage this represents – any benefit should be withdrawn from those who have had upheld complaints. They should pay full whack.

    • Yep have to agree, would this be the “regulatory dividend” we hear so much about ? Psstt ! dont tell anyone Harry, but there is a pot of gold at the end of every rainbow !!

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