Earlier this month, the FCA published its business plan for 2016/17 and an accompanying consultation paper on regulated fees and levies over the same period. As the FCA budget had increased, we expressed concerns it needed to be controlled more stringently.
Saying that, it was noticeable just how small the size of the FCA bill is in comparison with the impact on advisers in recent years of the levies for the Financial Services Compensation Scheme.
Our recent report, Financial Adviser Market: In Numbers, found adviser revenues in 2015 increased to £4.3bn from £3.9bn in 2014. Yet over the same period, the two measures of profit the report looks at both fell: profits before tax by 10 per cent and retained profits by 65 per cent. This can only be due to the large increase in FSCS levies over the same period.
It is not just the unsustainable amount taken out of the advice sector but also the way in which it can vary at short notice, as well as the overall approach taken to calculating the levy, which we believe needs to be changed. The instability of such a levy system means it is difficult for firms to plan for the future and innovate in the way the Government and the FCA would like to see. We would also question whether consumers seeking high-risk returns in unregulated products should be treated the same as those in conservative investments. Reform is clearly needed.
This is why we were pleased to note the Financial Advice Market Review final report agreed significant change was needed to the way in which the current FSCS levies are allocated. It specifically tasked the forthcoming review to examine potential risk-based methods of allocating the levy, as well as the possibility of widening the intermediaries funding class.
Although a levy funding method based on the risk and challenges inherent in a specific firm’s business model is the right approach, it is unclear what specific proxy for risk would be used. Care would be needed to ensure it does not create an additional burden and does not distort behaviour. Even if it could be successfully implemented, it would still pose the same burden to the same group of firms.
Instead, the best approach would be the combination of a product-based levy and an examination of what should be compensable. A product levy (where the FSCS sets a small surcharge for different product categories, either uniformly or varying, depending on the risk of the products) 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.
We also believe the scope of the compensation should be looked at. There should be a “whitelist” of appropriate products for retail investors as it would end the current practice whereby cautious investors bail out those who choose riskier products and might even deter investors from investing in products that are not suitable for them.
What is more, the FSCS potentially pays out 100 per cent up to £50,000 with 93 per cent of consumers who claim covered in full. Investment is not without risk and consumers must bear some responsibility for their decisions, so compensation should be a percentage of the amount invested beyond £30,000. Such a cap would reduce the FSCS bill and also create more engaged customers.
Although the FAMR disappointed in some respects, highlighting the FSCS levy review was positive. Advisers must use this opportunity to engage with the review and help us ensure a fairer and more sustainable situation for both the industry and consumers.
Caroline Escott is senior policy adviser at Apfa