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Advisers challenge FCA rejection of FSCS product levy


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.



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There are 9 comments at the moment, we would love to hear your opinion too.

  1. “Advisers were disappointed by the product levy being deemed outside the scope of the FAMR review”

    It was not part of the review because any suggestion that consumers should pay for their own protection does not fit with regulatory thinking.

    I am trying to think of consumer goods and services where the consumer pays a levy for protection themselves as part of the product or investment they buy.

    There may be an alternative though and that could be rather like an extended warranty product, where to consumer pays via an opt in insurance scheme.

    Or perhaps PI insurers could work on a cunning plan. The PI dies with the firm and this is why the FSCS gets called on.

    Just a thought

  2. Julian Stevens 3rd June 2016 at 12:24 pm

    Just like all the FSA’s previous consultations ~ a hollow, token sham masquerading as constructive engagement.

    Despite having strung APFA along with tantalisingly optimistic hints and suggestions that it might well be open to the idea of a product levy, it’s clear that it never had the slightest intention of sanctioning it (or, if necessary, approaching the Treasury for the relevant change of legislation.) They were just piddling down APFA’s back, telling them it was raining and APFA believed them.

    • Philip Castle 3rd June 2016 at 7:39 pm

      Julian, I agree with you. The F-pack dealings are disengenuos and a sham. But no talking to them is no solution either, all the a head butt might prove more effective every now and then and more satisfying than banging your head against a wall.

  3. Compliance Thought 3rd June 2016 at 12:27 pm

    So Libertatum, will you step up to the ockey and lobby parliamnet to change the legislation to allow a product levy.

    Win this one and I would imagine you will have advisers queing up to join.

  4. The current system effectively lets the offenders off and makes the good firms pay. The insurance (policy fee) method to funds the FSCS would have been fair and could have been voluntary to the consumer. When you purchase a large item you have a warranty, this is paid for within the cost of the purchase initially, you then have a choice to extend it if you wish.

    It is both unfair and immoral to make others good advisers and companies pay, which is the current system. Would Ford cover VW’s mistakes, would BP be bailed out by Shell? The other major flaw is that unregulated products are included if advised, which was never the intention and these have made up a very large percentage of claims. Many of these claims made by very wealthy people (many footballers) who frankly would have taken the stupid returns being offered, but when they don’t want the penny and the bun.

    The system is broken and a no discount reduction is meaningless as we will still be paying for others poor or fraudulent advice. The good will continue to have to pay for the bad and the ugly.

  5. Julian Stevens 5th June 2016 at 12:03 pm

    The principal reason why the FSCS’s levies have gone through the roof is its totally unconsulted upon and unjust practice of taking on the liabilities in respect of losses incurred by those who chose to invest via unregulated intermediaries, just because a handful of regulated intermediaries may have recommended them. Why should the regulated community have to cover losses incurred in respect of investments made via unregulated intermediaries who, of course, pay no levies at all? Why isn’t this the centrepiece of APFA’s efforts at reform?

    Also, it’s highly probable that most regulated firms that flogged these junk schemes failed to check whether or not their PII policies provide cover in respect of advice on them. Thus, almost as soon as the claims start rolling in, they find themselves unable to meet their liabilities and swiftly default. This strongly suggests the FSA has fundamentally flunked its responsibility to ensure that regulated firms have proper PII cover for all types of business on which they’re advising. So not only is the regulated community required to pay for the FSA itself but it ends up paying for its failures as well.

    Whilst the FSA cannot, on a firm by firm basis, reasonably enforce every single one of the thousands of rules in its multi-thousand page book of rules, one would might reasonably expect that, as part of its periodic regulatory returns, it might at least require firms to confirm that they have PII cover for ALL classes of business on which they provide advice. False declarations to the regulator should be made a criminal offence. How flipping difficult can it be? The downright uselessness of the regulator in this regard (like so many others) beggars belief.

    Any firms advising on unregulated types of business should be required to supply the regulator with a copy of their PII policy for thorough checking AND advice on unregulated business should be subject to special permissions, in much the same way as they are if they wish to advice on things like transfers out of DB pension schemes. Would this not constitute targeted and proportionate regulation, as mandated by the Statutory Code of Practice for Regulators? Yet again, why is the FCA allowed to completely ignore the Code? Why does APFA make no effort to take it to task on this issue?

    • Compliance Thought 6th June 2016 at 1:49 pm

      I assume you are regulated though a Network and not subject to RMAR returns.

      Within the RMAR section, if you do not have PI cover for a certain type of business, or have Excesses above certain limits, then you have to hold additional funds in your cap ad reserves.

      The issue is that unregulated schemes are very rarely suitable. This doesnt stop unethical advisers recommending them and lying on their RMAR returns. How do you stop that from happenning?

      By the time this comes to light, i.e. when claims come in, it is too late.

      There are numerous posts on these boards wanting to reduce the burden of regulation or remove regulation from the FCA for IFA’s and put it with a trade body. Until ‘IFA’s’ stop selling these schemes in the first place, the likelihood of a change in stance is minimal.

  6. Julian Stevens 6th June 2016 at 4:11 pm

    As stated in my last post: False declarations to the regulator should be made a criminal offence. It wouldn’t be very hard for any half competent regulator to investigate the PII cover of a firm that’s been forced into default in the wake of several claims against it for failed junk investment schemes. Whether or not it would actually take such steps is another matter altogether. Within the FCA, theory and practice seem to reside in two different universes.

    • Making it a criminal offence would in fact take it out of the remit of the regulator and into the hand of the police, who Im sure have better things to do with thier time and resource.

      The RMAR is only as good as the firm completing it, and if they are dodgy enough to recommend rubbish to thier clients then they will likely have no issue with being selective with thier returns.

      Face the fact julian – the FCA cant oversee every adviser, they have to resonably rely on data provided, which of course can be inacurate if the adviser so chooses and it wont ever be a criminal office.

      Maybe move on from the incessant moaning and do something more productive?

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