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Keith Richards: The FSCS alternative staring us in the face

Unintended consequences of the pension reforms could further affect access to advice, ultimately derailing consumer freedom and choice.

There is already evidence professional indemnity insurers are beginning to withdraw cover or harden terms for advisers associated with defined benefit transfers.

But this is not a failure of PII. It is a more fundamental system failure, which can only be solved by government intervention as originally intended as part of the Financial Advice Market Review.

PII has been investigated by the regulator as part of a wider review into the Financial Services Compensation Scheme. Well intentioned as it is, the FSCS was designed at a different point in time and has built up an unknown level of legacy liability over many years.

It is proving unfit for purpose and the growing concern over DB transfers is likely to compound the level of liability placed upon it, which will result in a poor outcome for both consumers and the market.

The time has come to look at a more broad-based solution, combining fair and cost-effective levies in tandem with a public financial education programme. This could be in the form of a savings and investment protection and education levy, collected centrally by government.

On the premise most in the market accept the need to contribute to regulation and protection, the funding could be achieved without any accusations of bias, unfairness or punitive prioritisation.

Consider this: funds under management in the UK retail sector – pensions, Isas, investment trusts, life investment products and so on – are worth around a trillion pounds. Meanwhile, FSCS levies, the cost of the Money Advice Service and The Pensions Advisory Service expenditure is £700m per annum.

Is a practical, affordable solution staring us right in the face? The total cost could be covered by a relatively negligible seven basis points deduction from the total funds under management per annum.

The current need for PII could then be disposed of if adviser contributions went into the same fund to pool the risk. Excesses could still apply but, over time, the build-up of such a fund would almost certainly reduce contributions and help mitigate financial failure.

Problem solved. System fixed. Over-reliance on PII obviated. Long-term sustainability inbuilt. Greater certainty for consumers, advisers and product providers and no gaping holes in the funding strategy or ability for withdrawal of protection when most needed.

This may not be the right solution but if insurers continue to harden their position, or worse, remove cover for PI, it will significantly expose firms and clients to some drastic unintended consequences of the pension freedoms.

Consumers will be far better protected by active solvent firms, whereas, currently, the FSCS significantly limits the maximum compensation that can be awarded.

Something needs to be done and fast. If a solution is not found, advisers and clients will be at significant risk of financial failure and the confidence and trust of the public will be irreparably affected.

Keith Richards is chief executive of the Personal Finance Society



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

  1. This sounds viable but, like the current system, it makes everyone pay the same whatever their history or field of activity. I am low risk and I’m not convinced that I should pay the same as someone who operates at a higher risk level. Perhaps the rate could be tiered to reflect the risk of claim as with PI?

    Also, we now live in a compensation-driven society where bad decisions by the client are treated the same as unsuitable activity by regulated individuals, both of which are wrong but very different.

    Advisers should face an additional 10% claim levy as trying to profit from bad advice should come with a greater penalty in order to increase the deterrent.

    On the other side of the claim, a 10% levy on successful claimants would force everyone to think twice before making a decision and just might change the way things are going. Advertise that and the public might take more care? At the moment, they don’t have to.

  2. Nicholas Pleasure 21st March 2018 at 10:06 am

    Interesting solution and it’s good that Keith sees the urgency of this situation; something that I suspect the regulator doesn’t.

    Long term this solution could be broadly cost neutral. If advisers and providers don’t need to make allowances in their accounts for large and unexpected levy payments, costs may fall.

    The one thing that Keith doesn’t cover is what happens about unregulated products. However, I think the solution here is that it would be clear that products that don’t pay the levy are not covered. This would mean that advice on unregulated products was also not covered and I would suggest a separate PII market for this. A bit of consumer awareness and the problem would be solved. A bit like most consumers understand that more that £85K in a bank account is not protected.

    Like Keith says, if this isn’t resolved soon, irreparable damage will be done to retail financial services.

  3. Yep count me in

  4. Christine Newell 21st March 2018 at 11:06 am

    Really interesting proposition and idea from Keith and definitely needs exploring sooner rather than later.

  5. There needs to be some form of accountability, to ensure bad selling practices can be moderated at a firm level, which is not the case with having a blanket industry levy, as suggested by Keith. The FSCS is flawed by allowing firms to go bust, with little or no proper pursuit of assets from those who have profited by their misdemeanours.

  6. Such a scheme might well address the problem of PI Insurance not being there exactly when it’s needed, either because the insurer has withdrawn cover at the first whiff of yet another hindsight review on the part of the FCA or because the firm has undertaken certain transactions without any PI cover at all in respect of those classes of business.

    What it won’t address, though, is the quantum of liabilities falling on the rest of us, presently by way of the FSCS. To tackle this, the FCA needs to get its act together, by:-

    1. Including in its GABRIEL returns relevant questions and discarding all the irrelevant ones, with suitably severe sanctions against those who deliberately omit certain information.

    2. Actually examining the data submitted (or installing in its vastly expensive IT system an auto-flag up feature) and homing in swiftly on any potential trouble spots (proportionate and targeted regulation).

    3. Insisting that all regulated firms must have in place relevant PII cover (or specific permissions from whatever body is created to administer the monies raised by these savings and investment protection and education levies that Keith proposes).

    Even if this new scheme does get off the ground, it won’t solve the present crisis overnight, for the simple reason that its coffers will take several years to fill and, until those coffers are full, the present crisis with the FSCS will continue.

    The problem facing us NOW and for the foreseeable future is PAST business which, unless vast sums of money are pumped into it right away, this new scheme simply won’t have the capacity to handle.

  7. Fine idea. But not a million miles away from a product levy. And this is something Mr Neale just wont countinence, if his answers to previous questions are anything to go by.

  8. I have been saying this for years.

    But the real problem is; the FCA FOS and FSCS really need to talk to each our and share data

    Then what is paid in premiums (if you will) can be based on real time figures and claims

    IE- FCA know the volume of business a company or individual writes, it can collect information on the product types thus knowing risk, it knows the various companies and individuals permissions, crikey we are nearly there. The FSCS should know claims data, FOS will know complaints data

    So packaged up we have pretty solid data on firms and individuals to set premiums on -:
    Claims history

    Yes, you are never going to stop liabilities falling on the rest of us, but there will be realistic outcome on the level of levies, than the stab in the dark we have at the moment, which is based on a percentage. Take me for instance my turn over might be high but its 99% vanilla!! so the risk I pose is minimal and my complaints are zero and permissions standard so my levies should reflect these points.

    Build in an actual product levy, based on risk, expertise and volume….Job done ! IMHO

    Lets face it, doing the same thing over and over will NOT change the result or outcome that defines stupidity !

  9. Something that has long been advocated but discounted by the powers to be!

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