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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.”

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Comments

There are 13 comments at the moment, we would love to hear your opinion too.

  1. FCA also need to review what is meant by independence. I do not wish to be forced to consider riskier products and pay more through such a levy simply to demonstrate independence!

  2. Would not the consequences of the failures of KeyData and ArchCru have been vastly less severe had the FSA been on the ball and taken steps at least to minimise their impact?

    As for the idea of a risk based funding model, that can only be achieved if the regulator implements a system that will enable it to identify and home in on firms engaged in high risk activities. As we know, its present system of GABRIEL Returns patently doesn’t facilitate this because the regulator doesn’t bother examining their content. If it did, it’d know who’s doing what and be able to act accordingly. Whether it would actually do so is, of course, another matter.

    The regulator doesn’t even require adviser firms to prove that they have in place adequate PII coverage for all their activities. Thus, when a regulated firm folds and disappears into the woods (often resurfacing shortly afterwards under a different trading name with fresh authorisation from the FCA) as a result of having been overwhelmed by its first few undefendable claims in respect of unregulated investment schemes, all its liabilities are dumped on the rest of us (the low risk guys who never touch unregulated schemes) by way of additional FSCS levies.

    As Nick Bamford rightly points out, a risk-based FSCS funding model is indeed a huge step away from where we are. Merely airing the idea of a risk-based funding model without a workable plan as to how to implement it isn’t really of much practical value, is it?

  3. I was at that meeting yesterday and put it to Mr Neale that General Insurance carries an impost of 9.5% ( A disgusting 20% for travel insurance!) – this is tax which the Chancellor pockets. Shares carry Stamp Duty of 0.5% – again pocketed by the treasury. So I cannot fathom the reluctance of a product levy.

    His statement “…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” is disingenuous. The number of non-advised customers isn’t that great and anyway the taxes as described above don’t differentiate.
    The IMA figures show that there is £5 TRILLION AUM as at Dec 2013. The inflow of funds alone in 2013 was £20 billion. If there was a levy of only 0.5% then this would raise £100 million. (On the assumption that a billion is £1,000 million).

    Then of course there is the outrage of the Treasury filching the fines – which should rightly go to the FSCS. The argument that this subsidises the culprits with lower levies is again easily solved. They don’t get a discount for the 5 years following a large fine. Just like points on a driving licence.

    No, the real reasons are that we are a soft target and there is no real determination to seek a sensible and equitable solution. In the end we put up our prices to cover the impost, only to get the idiots who govern us moan that the Great British Public can’t afford advice.

    Pah, humbug!

  4. It is some 4 years since I posted this article on a risk based mechanism:

    http://www.moneymarketing.co.uk/a-radical-solution-for-fscs-funding/

    Finally, it appears to have some potemtial traction, but it raises an important question – who is to decide on the levels of comparative risk? Would it be IFAs?

    What if IFAs as a group formed their own captive Insurer, and having arranged suitable reinsurance were the ultimate adjudicator of the risks – think Rating Agencies.

    If IFAs are to be the ultimate bearer of the costs of failure – might they not also be the best arbiter of the risks they want to bear?

  5. So that’s a ‘no’ to a product levy then. Oh well. That was quite easy wasn’t it! “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.” What absolute nonsense. This is where the regulator and associated agencies (FOS & FSCS) could really earn their corn, particularly with ‘High Risk’ products. They should be able to assess the products on offer in advance for consumer risk – you know, like they expect us to do in advance – due diligence they call it I think!and charge a suitable levy for ‘everyone’ purchasing the said product whether advised or otherwise. It produces a ‘class of business risk’ rather than dumping it on everyone who hasn’t been involved with it at all. It also centralises, simplifies and reduces the burden of reporting on every single firm out there. The HMRC realised years ago that it was far more efficient to delegate the responsibility for collecting income tax on employers rather than employees. There are far fewer employers than employees and there are far fewer providers than advisers! Furthermore the current and suggested system relies on the accurate reporting by advising firms. I wouldn’t be confident that the types of adviser who are prepared to recommend these high risk and often unregulated products will concern themselves about accurate reporting to the regulator. Why increase the complexity when it can be reduced? As it stands the FSCS is like some bizarre form of insurance where your motor policy covers you for income protection, life assurance, buildings and contents etc. But better still, the premium is paid for by the other driver! Let all the participants in the pool of risk share that specific risk and the relevant premium – and that is what the product levy would be.

    Of course the fly in the ointment would be any of the ‘F’ pack taking responsibility for the ‘due diligence’ they applied as and when products failed in the future. So my rant as always has been a complete waste of time. My wife was right – again!

  6. A risk based approach – based on the product not the adviser – will go some way to weeding out the cowboys who are giving us all a bad name – and costing us a fortune. If you want to invest in a villa complex in Mongolia for retired goatherds fine – but pay a product levy that represents the true risk you are taking on so when it goes pearshaped you’ve paid the price. If the FCA has the courage to stop the arbitrary regulated/non regulated product debacle, and make it compulsory to show the product levy as a monetary amount in bold on page 1 of the statutory illustration, along with the adviser fee/commission, maybe the world would become a far better place for the professional advisers who care about their clients and long term client relationships.

  7. I suspect a risk based approach would be quiet arbitrary in its nature.

    A product levy is not paid for by providers but by their investors in the same way as currently the FSCS for advisers is really paid for by the current clients fees. 5% – 10% at the current rates.

    If non-advised customers were a real issue their investments could be excluded from the calculation – easy

    Far more unfair is that historically there were 16m consumers advised by IFAs and they are the potential claimants in FSCS. But there are only 6m current claimants doing the paying. That is far more inequitable than a few non-advised but yet again the regulator seeks to protect the powerful.

    Why not do something about it and fund our fighting fund at http://www.libertatem.org.uk/par

  8. Alas dear colleagues, all of our collective wisdom on the rights and wrongs of the levy’s will come to nothing (as per usual) as the policy makers will always be swayed by those who can lobby the hardest and loudest, and they tend to be those with the biggest pockets!

    When I go through my fee disclosure with my clients many of them question (quite rightly) what they are paying for. When it comes to the FCA, FOS, FSCS bit they tend to sit there open mouthed as I tell them we have to pay for a non accountable retrospective regulator and to protect them from the wrongs of others.

    Many comment that the reason they are using our services is that they feel they can trust us because we are providing them with advice and not ‘flogging’ them some esoteric bio scheme is Uzbekistan!

    Oh well, best super glue the piggy back together and start saving for the next interim levy!

  9. Harry – is non advised any customer that has bought a product which did not come as a result of face to face advice? This issue is inexorably linked to the FAMR and my fear is that there will be no joined up thinking.

    • But you can also bet your bippy that these people also whinge to the Ombudsman (read some of the monthly reviews) and therefore may well be in line for FSCS compensation. Key Data anyone? (They were categorised as advisers!!)

  10. Why would it be so difficult to add an insurance to advised products for FSCS protection?

    The underwriting for this method would be much less than that of calculating the risks rated method currently being proposed and preferred by the FSCS. How are they going to risk rate advisers?

    There seems to be this drive towards the consumer must believe the payments are funded by some magical pot. Currently we are expected to pass the costs on, which suits the FSCS as the consumer does not see the actual cost they are paying. An insurance premium would clearly show the cost they pay for FSCS protection clearly. The FSCS is effectively being funded like a non disclosed commission with consumers believing it free and paid for by the Government. Even the adverts say set up by Government, but do not mention how its paid for.

  11. John Reilly (living the life thereof) ~ As you rightly point out, the regulator would never accept responsibility for analysing and risk rating products, not least because of the demand on its resources that this would impose (and we’re all clamouring for lower levies) and the likelihood of it getting most of its ratings wrong.

    Hence, I’ve suggested the alternative of contracting out the job to a group of independent research bodies (such as but not limited to those of the networks), whose collective conclusions would form the basis of suitable risk ratings. Then, if any particular product or scheme were to go unexpectedly bad, the regulator could legitimately deny responsibility, at least for its initial rating, on the grounds that it hadn’t done the research but had merely coordinated the findings of a number of other research bodies, each of which would have put forward its own suggested rating.

    That should be do’able, shouldn’t it?

  12. In my response to CP12/16 I urged on the FCA a risk based approach to compensation funding and reminded it that the concept of risk based funding had first been raised by the FSA in 1997, in CP5. I agree with some of the comments above to the effect that clients ultimatley pay. Here is what I said in my response to the FCA – “It is, however, naive for anyone to believe that consumers are not affected by the costs of compensation. All firms have to recover their business costs of which meeting the levy for the FSCS is one cost. It is very likely that all firms pass on to their clients some or all of the costs of paying their share of the levy. The higher the levy on firms the more likely it is that costs will be passed on in the charges which a firm makes for its own services to its clients. There is here a cross subsidy between different groups of consumers: those consumers who get attracted by the promise of high returns and do not exercise any care about the firm with which they do business are being subsidised by more prudent consumers.”

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