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Nic Cicutti: Solving the FSCS’ long list of problems

If there is one thing that really comes out of the current row over the scale of the 2017/2018 Financial Services Compensation Scheme charge on advisers, it is that the long-awaited FCA plans to reform the way the levy itself is imposed cannot come soon enough.

This vexed issue has been going on for long enough and it is time a solution is found that does not continue to penalise the vast majority of small advisers for the actions of a minority who take unnecessary risks with their clients’ money.

The amount of ink – and now server space – used to discuss different ways of addressing the problem is mind-boggling.

When I began to research this column, in the wake of the FSCS’s announcement last week it is proposing to charge firms £363m to meet the cost of redress payments to consumers for firms that have gone into default, my personal cuttings file alone indicates in the past 15 years I have written on the subject 88 times.

Millions more words, many of them angry and vitriolic, pour out in instalments every year: when an interim levy is announced, again when the forecast is made in January and a third time about now, when the final bills come in.

“The amount of ink – and now server space – used to discuss different ways of addressing the problem is mind-boggling.”

Blurring the lines

This time round, mercifully, there have been few major surprises compared with the forecasts. One slightly welcome development is the overall bill will be £15m less than outlined in the original budget proposal in January this year. Compensation costs largely related to Sipp claims will fall from £163m to £146m. However, investment advisers will end up paying £4m more than first thought.

In some ways, these distinctions between funding classes are meaningless: most advisers in the life and pensions market will also provide investment advice. Their firms will face levies come what may. The real issue is the way the overall funding system itself is reformed. In its consultation paper in December, the FCA said it was considering a number of options to reform both the funding of the FSCS itself and also address other not-so-tangential issues that impact on the levy.

For example, the increased costs and reduced availability of professional indemnity insurance for many advisers, not to mention the wide disparity in terms which makes this cover worthless for many firms. If they go into default and the FSCS comes calling, PII providers are tap-dancing their way out of making any contribution to the levy.

Providers: Pay up

One area the regulator needs to address is that of provider contributions to the levy imposed on advisers. I have wrestled with this in my own mind for some years.

On the one hand, as SimplyBiz chairman Ken Davy says, providers get a free ride from independent advisers compared with direct salesforces. On the other, many advisers choose to go independent precisely because of the freedom they have to operate how they wish in the market: should Aviva, say, be forced to fork out for an advisory firm that went bust after selling another provider’s totally inappropriate product to a client?

This implies advisory distinctions in funding classes may be less relevant to advisers themselves, but if a levy for providers is introduced it might be related to the specific activities they engage in. The riskier the product, the higher the levy should be on that provider.

The issue of risk-based levies is a hot potato – and not just for providers but also for advisers. For too long, a small minority of advisers have been able to shelter in certain funding classes and engage in activities that go well beyond what the vast majority of their colleagues consider sensible. Others will occasionally allow themselves to be blindsided by the lure of potential returns that seem deceptively easy to achieve.

It is time they paid more. The regulator’s proposal to amend payment arrangements so that firms are asked to pay a proportion of the levy on account allows the option of saying to a firm which recommends products that go beyond a clearly-defined risk range: “That’s fine, but you need to pay more for the privilege of doing so.”

That could be linked to a rolling five-year programme whereby if no recourse is made on that levy or there is money left over in that particular pot, it can be used to reduce the levy for that risk-related class in subsequent years.

Phoenix rising 

There is a further issue that needs to be raised in connection with the FSCS levy: it concerns the personal responsibility of individual advisers who, to use a nautical analogy, sometimes decide to swim away from their sinking businesses because they know a compensation lifeboat will be there to pluck their surviving clients out of the water.

There is rarely any comeback against these individuals beyond a slap on the wrist and, occasionally, a restriction on their ability to remain in the industry.

That has to change too. The current capital adequacy requirement for all advisers needs to be raised to the 10 per cent level needed by advisers who currently hold client money. We need a far greater emphasis on directors of firms that go into default placing their own personal assets on the line when compensation is paid out.

The “polluter pays” principle must be just that – except the money should also come out of advisers’ own pockets.

Nic Cicutti can be contacted at nic@inspiredmoney.co.uk

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Comments

There are 7 comments at the moment, we would love to hear your opinion too.

  1. ……”should Aviva, say, be forced to fork out for an advisory firm that went bust after selling another provider’s totally inappropriate product to a client?”
    Well, yes Nick, why not? Currently I have to pay when some greedy retard sells some outrageous product from a provider and the product fails, the clients complain and the adviser firm closes. Why should a provider not do the same? Most providers seem to make a lot of cash from the business sent to them by the advice community. Why should they not pay something towards the cost that is caused by a minority of advisers?

  2. The time is right for Mr. Bailey to consider the use, or in reality, the miss use of banking and other big misdemeanour fines to fund in all or part the levy?

    FCA fines were to be used to offset the cost of regulation. But not any more.

    Why, well here’s the thing as they say.

    Over the last century or two the nations wealth and success was built on our vast below ground natural resources.

    Coal, tin, oil, sand, cement, gravel extraction have all played their part but many fear that these resources have a limited life as dwindling stocks make it more expensive to recover.

    Alongside all natural resources there is a tax raising opportunity but if stocks of natural resource reduce or become exhausted this will, in turn, see tax revenues reduce and that spells trouble for HM Treasury.

    But the nation has turned to another ‘natural resource’ because of some very clever HM Treasury ‘fine-fracking’ on the part of the last government

    The FCA’s own information about fines published during the calendar year ending 2016 showed that:

    The total amount of fines levied in 2016 was £22,127,442.

    In 2015 £905,219,078 was levied
    And in 2014 £1,471,431,800 was levied.

    The FCA deducts its costs from these huge amounts and the rest went to HM Treasury. The FCA was obliged by statute to pay away £1.370bn of the 2014 fines to the Treasury, the equivalent of 70% of all alcohol and tobacco levies for 2014.

    In April 2016 the FSCS announced a £337m levy for 2016/17.

    The FSCS levy in 2015/16 totaled £319m.

    So over the last 4 years some £2.4bn in fines has been levied that could have seen zero FSCS levy for a good number of years with the polluter paying. Just do the math!

    FCA fines should be used to reduce the burden of regulatory cost, in particular that of the ‘oh so’ contentious FSCS levy that hits, in particular, small IFA businesses the hardest.

  3. Nic you need to correct your very first opening line…

    “If there is one thing that really comes out of the current row over the scale of the 2017/2018 Financial Services Compensation Scheme charge on advisers,”

    Advisers needs to be altered to “advisers clients”……. you included, if you are indeed yourself, have a or use the services of a adviser or company.

    These like any business cost, fees, compliance, regulation, levies, PI etc etc etc etc the list is not exhaustive (well from an FCA view point, as they seem they can spend, on what and how much they like)

    The cost for advice in isolation is small but the the peripheral nonsense makes up the difference, and this has to be passed on to the end user (the client) in the case of going bust or not.

    Adviser ? …… I dont know about the rest of my peers, but I feel like a back door tax collector.

    Its a very good piece of propergander (and if you look at this carefully as the word suggests) you will see the FCA, FSCS FOS MAS etc etc is not free and certainly is not paid for by the industry, we collect from the consumer and forward on ! the conduit; if you will.

    • Agreed, this is a good example of an unpalatable truth. All of these costs are ultimately borne by the client. Indeed, it’s even easier at present given the current market for advice being very much a seller’s market.

      In many ways advisers would be better off accepting all these fees, sitting back and re-charging the client. The message should be ‘no big deal, my clients will pay, I’ll just increase my charges’. Treat it like VAT, just add it to the bill.

  4. robert milligan 21st April 2017 at 4:22 pm

    I think the only way to keep all happy is if the FSCS can and will only Provide compensation for Regulated Advice on “Regulated Products”, and the cost of funding the FSCS is paid for by “all” those Regulated, I can not understand why most of the FSCS payments are reimbursing clients loss’s from Unregulated Investments, albeit possibly within a Regulated Contract! Therefore, the advice process should include a warning of no protection when investing in Harlequin/Storage Units/Timeshares ect…..Why

    • It’s the advice that’s regulated, irrespective of the product sold. You cannot selectively remove [the sale of] unregulated products from the responsibilities of regulated advisers and therefore, by association, from the protections afforded by the FSCS. To do so would be to invite an orgy of selling unsuitable products with impunity, not least because few if any PI insurers are prepared to provide cover in respect of unregulated products.

  5. With respect, Nic, the problem isn’t the FSCS itself or how its funding is divvied up. It’s the boatloads of uninsured liabilities it has to take on because the FCA has failed over so many years to identify and act upon firms selling high risk toxic junk, often (possibly in nearly every case) without adequate PII cover. So, almost as soon as a succession of indefensible complaints starts rolling in, said firms shut up shop and dump their liabilities onto the rest of us by way of the FSCS. Before this started happening, few if any regulated firms ever complained about the funding of the FSCS or their share of it. For the FCA now to be “consulting” on alternative funding methods is just talking about options for shuffling the deckchairs around whilst steadfastly ignoring the gaping hole below the waterline.

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