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FSCS funding model attempts to bring certainty but at higher adviser cost

FSCS-Piggy-Bank-500x320.jpg

The Financial Services Compensation Scheme has set out how it plans to calculate industry levies based on expected claims over the next three years.

In a paper setting out its approach for the new funding model, published today, the FSCS says from April 2014 it will raise levies based on either the compensation costs expected in the 12 months following the date of the levy; or one third of the compensation costs expected in the 36 months following the levy, whichever is higher.

Based on the models worked up by the FSCS, they suggest investment advisers would have been hit with the maximum levy of £150m for 2013/14, instead of the £78m actually levied on them under the current model.

The FSA first put forward plans to project potential compensation costs over three years rather than one last July, as part of its review of the way the FSCS is funded.

The review has already seen the annual claims limit for investment advisers rise from £100m to £150m, and the creation of a “retail pool” which would be triggered if one class breaches its annual claims limit.

The FSCS will use a five step process to determine levies based on three year compensation costs:

  • Assess the average figure paid by each class in compensation costs and FSCS management expenses over the last three years;
  • Adjust for exceptional costs that are not expected to reoccur, or declining claim trends. In its examples (see below), the FSCS has included the cost of Keydata claims in its three year average as they are “not considered exceptional”. The FSCS says although the costs of Keydata were high, they were not beyond the “usual level of costs” that had to be met by investment advisers;
  • Add costs of known or expected defaults in the next three years. The FSCS admits this is likely to push up average annual compensation costs for relevant classes;
  • Factor in new or current upwards claims trends;
  • Account for opening balances for each class. Surplus amounts will be used to reduce the three year amount, before it is divided into yearly periods. Deficits will be added to the next year’s levy.

Levies will be capped at annual class thresholds.

The FSCS says: “By taking a longer view of potential compensation costs the FSCS may be able to offer levy payers greater certainty. The FSCS favours a relatively simple and transparent approach, which will avoid unnecessary expense to the industry.”

Feedback on the plans for a three year funding model should reach the FSCS by 31 July.

Example of average FSCS costs over three years that would have been used to set 2012/13 levy:

FSCS 3 yr funding model table 1.jpg

Example of average FSCS costs over three years that would have been used to set 2013/14 levy, including 12 month forecast:

FSCS 3 yr funding model table 2.jpg
Source: FSCS

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Comments

There are 16 comments at the moment, we would love to hear your opinion too.

  1. Have I missed something here? The industry and the FSCS agree that their funding model costs are not sustainable and yet the review they are doing means that costs are actually going to go up? AS the youngsters these days would say in text talk…. WTF!!!!!
    Only a Quango could come up with a new model to curtail costs that means it increases. It really is time for a total overhaul of the entire regulatory, FOS and FSCS system or within the next 10 years there will be very little of the industry left to regulate.

  2. As the first poster, Marty, implies there is a huge danger of irreperable damage being done to the this industry and to the nation as a whole. Any hope that the FCA would be better than the FSA is rapidly disappearing now.

  3. FCA fees up 16%, now FSCS, PI increases, cost of complying with new regulation, MMR around the corner!
    Sooner or later more of the remaining firms that fund these Quangos will leave due to the oversome burdon of TOTAL regulatory costs including the hours spent complying resulting in people realising the “sweat for bread” ratio no longer works…..

  4. The pips are starting to squeak!!

  5. John Blackmore 3rd July 2013 at 11:50 am

    Anon 10:41 – Some of us have already left. Not sure this is what the FSA/FCA wanted but in many ways I think that I should thank them. After years of putting up with regulatory nonsense – much of which if followed would disadvantage clients – I decided to cease being regulated. Wish I had done it sooner.

  6. Anon @11.50
    Amen to that.

  7. Stephen Rowland 3rd July 2013 at 12:16 pm

    Have part disengaged from Investments (client bank not rich enough!) – What are all you Retired IFA’S DOING?

    TOO YOUNG TO FULLY RETIRE (55)

    HAD ENOUGH LIKE ANON11.50AM!

  8. Spot on Marty !!

    We all know FSCS, FOS,FCA and government don’t give a S&*t about rising costs the only time they will start to look at this is mass non payment, however getting that organised would ny impossible, we will continue to be fleeced, they will continue to waste money on a massive scale.

  9. Don’t forget with the new FCA calculations for fees are based on GROSS turnover resulting in them taking a bigger percentage of a larger pot
    then all the other regulatory necessaries inc FSCS taken off

  10. So the only certainty is more sh*te. If in doubt, look at the nearby bucket.
    What’s it full of?
    Yep; sh*te.
    Who’s holding it THIS time?
    The FSCS
    Where’s it going?
    Over me ‘ead.

  11. Julian Stevens 3rd July 2013 at 2:46 pm

    The only way in which the costs to advisers of the FSCS can be brought down is if the FCA prioritises the allocation of resources towards halting the endless succession of motorway pile-ups and train wrecks that seem to have been the dominant features of its predecessor’s period of tenure. And the only way that can happen is if the FCA is forced to abide by the precepts of the Statutory Code of Practice for Regulators.

    Carte blanche freedom for the regulator to set its own agenda and charge the industry whatever it fancies clearly hasn’t worked. But nobody in any position of authority seems to be talking about the need for a seismic shift in terms of just what the regulator is allowed to do and in what ways.

  12. Both the FSA and the FOS need to set out a proposed course of action whereby they aim to shrink their rapidly expanding empires.

    Shift their collective bulk out of London and into the provinces where rents and salaries are less perky.

    Seek to focus on the issues that really matter and avoid the piddling trivialities that my compliance visits have unearthed.

    Perhaps the FOS will then be able to scale back on its use of temp staff and the FCA can become the lean well-oiled machine that its senior staff probably imagine it to already be.

    If these actions are taken the FSCS monster will similarly shrink.

  13. Re Chris Miller, thanks for the comment…..made me laugh.
    And you are right
    I am just not getting job satisfaction any more, clients have no idea of the costs or hoops we need to jump through and I am now actively looking for the exit because life is not a rehearsal and at 53 I want to start looking forward again without the weekly bucket of sh1t being dumped on my desk, email or bank account that I have no control of.

  14. @ Julian Stevens

    I hear what you say and totally agree, however, nothing will be done until the industry has diminished beyond recovery and by then its to late. They will not listen to reasonable arguments (it seams from anyone) and we are forced to feed this monster until it has stripped out every natural resource we have.
    I also mirror what some others are saying, day by day I hate this job more and more.

  15. I too have left the industry and it is great! I managed (to my surprise) to land a job where I get a regular pay check with no worries. Each month it lands on my doorstep and I can spend it without worrying about claw backs, FSCS, FCA fees or compliance visits. I too wish I had done it earlier and had a life. The way advisers are treated by being treated as ‘guilty’ when a CMC sends in a false claim is despicible and this treatment and ‘fee culture’ will continue until IFA’s say ENOUGH! and withhold their fees en-masse! Only then will anyone take notice.

  16. Most people i know dislike their jobs, there is little pension and investment accumulation, its just people moving pension funds about now. This country has a ticking timebomb on its hands. The rdr has failed as providers take initial advice, mac and then ongoing advice fees on top. Is the consumer better off? No. Is the adviser better off? No.

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