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FSCS funding model fails to address ‘untenable’ adviser costs

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Advisers say the Financial Services Compensation Scheme’s proposal to calculate levies over three years is being distorted by Keydata and fails to tackle “untenable” adviser costs.

From April 2014, the FSCS 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.

In a paper setting out its approach last week, the FSCS has worked-up models of how levies would be calculated under the new three-year model. These 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 plans to use a five step process to determine levies based on compensation costs forecast for the next three years: assess the average costs in each class over the last three years; adjust for exceptional costs that are not expected to reoccur; add costs of expected defaults in the next three years; factor in new claims trends; and account for any surplus or deficit for each class.

The FSCS has not stripped out the cost of Keydata claims in its models showing average FSCS costs paid by each class over the last three years, saying although the cost of compensating Keydata investors was high, they are not “beyond the usual level of costs” met by the investment intermediation class.

But Apfa has challenged this view, arguing compensation levies under the three year model should be adjusted to exclude Keydata costs.

Director general Chris Hannant says: “We would argue a breach of the class threshold, which has only happened once in the FSCS’s history, is exceptional, and the effect it has on the numbers could be significant.

“By taking its proposed approach, the FSCS is distorting the calculations and risks making levies more volatile and leaving firms out of pocket. We urge the FSCS to look again at its approach, and reconsider the criteria it will use to determine exceptional factors.”

In 2011 the industry was hit with a £326m FSCS interim levy, with Keydata accounting for £258.8m in claims. Of the total interim levy advisers had to pay £93m while fund managers paid £233m.

Atkinson Bolton Consulting director Simon Gibson says: “I would argue the Keydata costs are exceptional. Just because a major collapse has happened once, this does not necessarily mean it will happen in the immediate future.

“I am all for consumer compensation, but the key is it has to be appropriate. With increasing regulation, there is the potential for the level of FSCS claims, and therefore the costs on advisers, to get worse rather than better.”

Pilot Financial Planning director Ian Thomas says: “The fundamental issue is not three-year versus one-year, but the way firms are categorised. Investment providers and stockbrokers continue to be thrown in the same class as smaller financial advisers, which just makes FSCS costs untenable.

“You almost feel powerless when you see these kind of proposals, because it is hard to see how I can change what is happening.”

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Comments

There are 4 comments at the moment, we would love to hear your opinion too.

  1. Watt Balderdash 12th July 2013 at 10:19 am

    What a dog’s dinner! Advisers cannot keep absorbing these ever increasing regulatory fees. Would not a product levy be fairer?

  2. I dont think theres anyone who actually now champions the current scheme, on any side.
    Even the FSA paper that came out noted that there might be reasons to change it but said that doing that was for Parliament to do, and so in the interim it would plough on regardless. Or something like that.
    So who now is picking this up in Parliament?
    Its a poor scheme with poor principles behind it and whats worse is that it wont really work in a REAL crisis. Forget KeyData, what if Equitable Life happened next week??
    We need a complete overhaul of the mechanisms AND the principles, ie perhaps people shoudl be allowed to buy products and take advice WITHOUT compensation if they wish and if it gets them a cheaper product, AND we should have product levies including an ADVICE levy, for those that do wish to include compensation.
    Someone needs to urgently do something though. WHO is responsible? What is their name?

  3. Some interesting suggestions Paul. Are you suggesting Keydata was not a crisis? And what about the fact that the banks are now paying for the fact that the scheme did rescue millions of savers.

  4. Julian Stevens 15th July 2013 at 7:23 pm

    A major contributory factor to the size of the FSCS levies is the FSA’s continuing policy of dumping onto the IFA sector the costs of mopping up in the wake of its own failures. The two most obvious examples, of course, are ArchCru and KeyData, the latter not even an intermediary by any objective measure. Resolutely oblivious to all cries of dissent, the FSA just decided unilaterally to classify it as such and there’s been nothing that anyone’s been able to challenge it, least of all being able to refer the matter to any sort of independent arbitrator.
    That aside, the whole infernal cost of regulation is rapidly becoming untenable because the regulator seems to be constitutionally incapable of finding a cost-effective way of doing ANYTHING. Example:-

    1. Client claims (but appears to be under no obligation to prove) he didn’t properly understand the nature of an investment into which he put money.

    2. Cost-effective solution: Consult (and listen to) the industry with a view to finding ways to streamline and clarify the ways in which products’ key features are communicated to clients.

    3. FSA solution: More verbiage, more paper, more expense, in the misgotten belief that what clients need is more of everything.

    4. Result: More consumer confusion and less consumer engagement.

    How can the FSA not see this? Because, as usual, there’s none so blind as those who will not see.

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