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.”