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.
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 firstname.lastname@example.org