Advisers have been left disappointed after product-based levy has been ruled out as a potential funding model for the Financial Services Compensation Scheme.
The FCA held its first roundtable meeting about the FSCS funding model last week after the Financial Advice Market Review kickstarted a review into the scheme.
The review is expected to consider the fairness of the current funding classes, the scale of impact on firms, and the impact on the scheme from sectors that do not currently contribute at all or enough.
While a product levy was deemed outside the scope of the review, because it would require a change in legislation, it is understood that risk-based and “smoothing mechanism” approaches were raised as two potential solutions.
The FCA is due to launch a public consultation later in the year.
Personal Finance Society chief executive Keith Richards says: “The advice sector has a huge role to play in shaping an improved and fairer funding mechanism, with the consultation allowing everyone to engage constructively bearing in mind that the FSCS was put in place to protect consumers and allow them to engage financial services with greater confidence.”
Advisers were disappointed by the product levy being deemed outside the scope of the review.
Yellowtail Financial Planning managing director Dennis Hall says: “That is disappointing that has been ruled out and that a change in legislation was seen to be a step too far to get a funding model that would be fit for purpose. What we will end up with is something that is not quite fit for purpose because no one wants to go through the hassle of re-writing legislation.”
While Aspect8 financial adviser Claire Walsh says the product levy decision is a “shame” she considers a risk-based levy the most interesting proposition.
She says: “That is fair because it is on the basis that things that are most risky attract higher premiums. That is the fairest way to do it.”
However, Hall adds: “That is the same amount of money but without a surprise. A risk-based levy is a part-way solution but there could be unintended consequences. A product-based levy would have been a good way to go because it is the ultimate purchaser who funds that whether they go through an adviser or not.”
In April, FCA chairman John Griffith-Jones offered support to ‘polluter-pays’ funding model for the FSCS and revealed the regulator would explore giving firms a ‘no claims bonus’.
Also in April, trade body Apfa backed a product-based levy as well as a lower compensation cap, as a way to bring down the cost to advisers.
Apfa policy adviser Caroline Escott said at the time: “The best approach would be the combination of a product-based levy and an examination of what should be compensable. A product levy collected by firms and passed on to the FSCS would be neutral for a business’ finances in the same way as VAT. It would provide greater stability, although an element of pre-funding would be necessary.”
The FCA and FSCS declined to comment.