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FSCS chief Neale rejects calls for a product levy

Financial Services Compensation Scheme chief executive Mark Neale says he does not support advisers’ calls for a product levy as an alternative means of funding the scheme, saying it amounts to a tax on consumers.

In February, Money Marketing reported that there was widespread support in the industry to fund the FSCS through some form of product levy.

It followed the £93m interim adviser levy announced in January this year, mainly to cover the compensation costs of Keydata.
But Neale believes the cost of funding the FSCS should not be met in this way.

Speaking to Money Marketing, Neale says: “A product levy is effectively a tax because it is a tax on the end consumer. That is very different from a model in which the industry meets the costs of the FSCS and the compensation costs that we pay out. I think that the industry should pay, it is the right way round.”

The Investor Compensation Scheme directive and the Deposit Guarantee Schemes directive are currently being negotiated in Europe and will shape how the FSCS is reformed.

The FSA has delayed its consultation on the FSCS’s funding model until these rules are finalised.

In April, the European Parliament called for all investor compensation schemes to be pre-funded within five years, with a minimum compensation level of €100,000, compared with the current £50,000 level of protection for UK investors.

Neale says he has no preference over either a pre-funded model or maintaining funding through industry levies, as is the case currently.
He says: “The current levy system has the very distinct advantage that you do not take money out of the industry before you need it in order to meet compensation costs. The other side of the coin, as became apparent over Keydata, is that when you have a big call, then that comes as a bit of a bolt from the blue to the industry.”

Neale says the FSCS did attempt to make the industry aware that it would face significant costs due to the failure of Keydata through quarterly updates and conversations with trade bodies throughout 2010.

However, he says the trouble was that for much of 2010 it was difficult to calculate what the exact compensation costs would be.

Neale says he is keen to see the FSA resume its review as soon as possible.

He says: “I certainly feel that once we have got clarity from the European Union on pre-funding, that review needs to get away so that we can look at whether there are ways of funding the FSCS which would command wider support within the industry.”

He believes any funding reform should be supported by as much of the industry as possible, given the impact Keydata levies have had on firms and particularly small businesses.

He says: “The fundamental point is that we are funded by the industry and we exist to provide a compensation scheme on behalf of the industry to consumers to underpin confidence.

“So it is very important that the approach to funding the FSCS commands as wide support in the industry as possible, including among smaller businesses.”

But Neale points out that although reform may see the FSCS’s costs shared differently, the overall cost of running the scheme will remain the same.

He says: “It is clearly a zerosum game. So any changes to the way we are funded may redistribute the costs of compensation across the industry but they will not unfortunately reduce those costs.

“The key issue is how do you pool the costs across the industry and in particular how you can reflect the different risks that different parts of the industry present in pooling the costs.”

The FSCS publishes its plan and budget, which provides first estimates for the levies firms will face for the next financial year, in February. The timetable means that even if Europe agrees compensation scheme funding models by the end of the year and the FSA resumes its own FSCS review straight away, firms will still have to pay for the FSCS next year through levies.

Neale says: “Realistically, the levies for next year are likely to be set on the current basis. It is almost impossible to carry out a proper consultation following European legislation in time to inform the setting of levies for 2012/13.”

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Comments

There are 14 comments at the moment, we would love to hear your opinion too.

  1. Arse about face or what?
    A product levy levies the money against the users of all the products ernsuring that those that fail have at least contributed towards that levy.
    A levy against firms as thinsg stand at the moment, means that the firms pass it on to consumers who have never used the failed product….

  2. The levy IS already a tax on consumers – what rubbish. If we disclosed our charges last year in more detail, the £150 per hour charge would be broken down to include a £4.00 charge for the FSCS (and rising fast!).
    Like politicians, the FSCS would prefer a stealth tax to make their life easier.

  3. This guy is clearly detached from reality and knows not what he waffles on about. Does he think that the current fees are created by me with a printing machine or our funky new colour copier? Does he not see that fees charged to me are passed on to the consumer – obviously not, it seems he would struggle with even a GCSE in Business Studies. Hey ho, at least he is making himself busy wondering whether on not to blow another £4m of other peoples’ money on another set of TVs.

  4. It may be a surpirse to Mark but those of us in the industry derive our income from the consumer. As a consequence of having to support failures of governance at many levels, when a levy hits our business we then on cost this in our fees to………(keepipng up Mark?) …….the consumer.

    And sadly my clients who have not been advised to go anywhere near Keydata or Arch Cru end up picking up the cost of failed regulation/governance.

    No system is perfect but one where I have to research and make assessment, choose to steer clear of certain investments but then pick up the cost of the failure of those investments, does not sound anywhere near perfect to me…….or my clients!!

    If nothing else Mark open your mind to a meaningful debate as I am out of pocket because of Keydate and wonder if I would have been if I had enjoyed commissions from those products rather than steered clear of them.

  5. As the cost of Car Insurance failures is covered by an insurance premium tax, what is wrong with an investment premium levy on products.

    makes sense to everyone except those whose job it is to see sense.

    Lunatics running the asylum or what!

  6. I did sell Keydata Life Settlement products (not many as I felt them unsuitable for most of my clients and those I did only had a small % of their total portfolio invested) and I would have been happier with a product levy as I think it would have been fairer to Greg B above. I would happily have rebated the commission I received on the clients investments (in lieu of fee as we operate adviser charging), but had I done so, it would have served no purpose as I still think the product was suitable for those clients I advised, none have complained about my advice, but I believe the product had undiscolsed/hidden flaws and FSA failures so the client’s should have and have been refunde due to the product failures. If I rebated the commission I received, the FSCS could imply I was accepting responsibility and come at me for the lot, when all i want to do is not PROFIT from my clients loss…., nor have other advisers pay for what were product and FSA failures.

  7. Absolutely agree with all of the first five postings her. Mark Neale is yet another chump.

  8. So it’s okay to tax advisers for something that consumers benefit from surely it is the consumer that should be paying for the service.

    It would also mean that product providers would be forced to provide products that are more beneficial to consumers as at present there is no restriction on product providers in providing bad products. The regulator could even raise this levy on products they deem to be high risk and should ban product is where they are completely unacceptable.

    The liability should always be with the product providers and not with the advisers “cart before horse comes to mind”

  9. Why is it that these chief Executives of government quangos always stick up for the large corporations could it be that they are looking after their next job application. It is clear that the people that should be paying for this are the product providers as many IFA firms are small businesses that by no fault of their own end up footing large levies due to irresponsible product providers.

    Smacks of vested interests to me!!!!

  10. As the consumer benefits whats the problem if it is a tax?

  11. I agree with all the postings and Peter Herd about ‘looking after the next job application’. These people should be disbarred from accepting positions in regulated companies after their current positions, as a blind man on a galliping horse can see that they are bent towards the banks & insurers. All financial offerings should be graded and the more risky pay a higher levy than the less risky. This way the client will be aware of the risk and know that they may have a higher return but be responsible if they loose. The lower levied investor may have a lower return but be less liable. A win / win for client & industry.

  12. I agree with most of the other posters above. If Mr Neale was writing a suitability letter, then his reasons for selection of method would be a FAIL and so would his reasons for rejection. Nor could he demonstrate (as we do as a firm) through a recording of his spoken word to his clients (in this case US as it is US who pay the FSCS levy and not consumers, although it is passed on to them as otherd have explained) the INTENT behind his decision and would therefore be liable to the accusations made by Peter Herd above which as an adviser could result in a hefty loss to the business due to an FOS decision for failure to act in the CLIENT’s interests.

  13. Instead of it being fully funded would it not be better to have it fully insured? Why have a cap on the ‘fund of last resort’? What possible use is this scheme to those who lose £1million? If someone can afford to invest £2 million they would probably welcome the opportunity to insure that investment.

    When will you regulators ever learn?

  14. Since when did employees make public statements about fundamental policy? This is a matter for his political Employers to comment on, Or are they afraid that the public might actually vote against another tax whilst the industry has less of a choice – paywhatever new tax we decide or we take your job away !

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