FSCS eyes risk-based model in radical adviser levy overhaul

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The model for the Financial Services Compensation Scheme levy could be radically redrawn as part of its 2016 funding review, chief executive Mark Neale says.

Currently advice firms are charged on a pay-as-you-go basis which fluctuates depending on the level of compensation paid out to consumers.

But speaking at the Money Marketing Brave New World retirement conference in London yesterday, Neale said the FSCS’s funding model could be switched to a risk-based approach to address concerns advice firms are struggling to cope with costs.

He said: “Our levies can be lumpy and unpredictable. Over the last six or seven years we have paid out around £1.5bn in compensation in the advice sector. But a very significant proportion of that spend has been from a few failures such as Keydata and Arch cru.

“We get that firms find it difficult to absorb these unpredictable calls for funding and find it hard to pass those costs on.”

Neale said a variety of alternatives will be considered as part of the review. These include a pre-funded system or a model based on the risks taken by individual firms.

However, he played down the appeal of a product levy.

He said: “If a product levy means simply transferring costs to providers I don’t see that as a fair solution, not least because costs will simply be passed on to non-advised customers.”

Investment advisers’ share of the 2015/16 levy is £116m, while life and pensions advisers will pay £100m. Since 2009/10 just over £1bn of compensation has been paid to consumers relating to advice in these sectors.

Informed Choice executive director Nick Bamford says: “At the moment the system is not really insurance as there’s no underwriting. Switching to a risk-based model would be a hugely different way of funding compared to now where all firms get lumped together.

“It’s a very interesting idea and I would favour risk modelling of the contributors to the FSCS, but it’s a huge step away from where we are.”

Page Russell director Tim Page says: “A risk-based levy is a wonderful idea and would encourage advisers to think about the long-term consequences of their business models.”