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Keith Richards: Time for an FSCS product levy

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Retail financial services clients in the UK benefit from one of the most highly qualified professional advice sectors in the world and are protected not only by every advisers’ mandatory requirement to hold professional indemnity insurance but also by a comprehensive regulatory framework and compensation mechanism.

However, all this comes at a cost and it is becoming increasingly reckless to continue with a Financial Services Compensation Scheme funding model so clearly flawed.

The recent news that yet another interim levy of £29.5m is expected to be raised against investment advisers due to the failures of life settlement firm Catalyst and stockbroker Fyshe Horton – with the threat of further interim levies to come – further highlights the need to review the funding framework.

Regulatory and compensation scheme levy alternatives were discounted during the last regulatory consultation despite the FSA acknowledging that valid ways to overcome some of the obstacles and issues raised in operating a levy system had been identified.

While the FSA proposed to shift some of the burden to product manufacturers in its last consultation paper, this is equally not the right solution for the long term. The intermediary market has to be clear and transparent regarding costs and it goes against these principles to bundle the ever-increasing cost of regulation and compensation in to the industry’s pricing models.

The current FSCS funding strategy is unsustainable and poses as much of a threat to consumers as it does to the advice profession. The current strategy will continue to impact adviser firms if not addressed and could ultimately undermine the regulatory and compensation scheme foundations itself. It is disappointing that a better and fairer solution has not been considered, especially as many analysts were expecting business levels to drop post-RDR and of course many still feel that the true impact has not yet materialised.

Adviser numbers further reduced in the lead up to the RDR and although a greater number remain in 2013 than had been predicted, and indeed the gross population has increased by 5 per cent since 31st December 2012, it is still a smaller pool of individuals paying an increased share of increasing costs.

Recent consumer research, jointly conducted by Compeer and E&Y, revealed that 66 per cent of consumers believe the additional cost of regulation will be passed on to them. Unbundle costs and make them more transparent rather than risk advice looking unnecessarily expensive with bundled charges and continue to risk the financial impact of uncapped levies.

Of course, this is not suggesting that the consumer bears all the cost as it remains perfectly reasonable that the profession should contribute towards regulatory and compensation levies at a base level. It is simply the increasing and uncapped level that is unreasonable and untenable in the long-term. 

Introducing some form of regulatory and compensation scheme levy is probably less attractive for the Government as it might be seen as another form of tax but as consumers do accept that they ultimately pay, there is no need to hide the truth. Introducing some form of levy similar to that of the insurance premium tax for general insurance products should be an acceptable move, given that consumers only pay for what they use.

Easing the financial burden on advice firms would allow more to effectively invest further in developing systems and proposition solutions to help deliver better consumer outcomes.

Keith Richards is chief executive of the Personal Finance Society 

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Comments

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

  1. “Regulatory and compensation scheme levy alternatives were discounted during the last regulatory consultation”. A very diplomatic way of putting it. More like casually dismissed without further consideration. If, as claimed by David Geale, the FCA really is different from its previous incarnation, should it not revisit these proposals with a fresh and open mind and this time genuinely take on board what so many people are trying to tell it?

  2. And this appears on the morning I get an email from the FCA reminding us to complete a fee tariff data. You know, the one that has to split advisers charges and other income already broken down for the RMAR return further in to illogical, ill defined, irrelevant categories using a manual process which is so divorced from reality.
    I could not agree more with Keith but he needs to be aware of how to fairly charge for advice. It is very alarming though that Keith still focuses on a product levy. Perhaps this is why we are lumbered with the ludicrous regulatory system we have at present?

  3. The FCA as the FSA Mk2 continue to pay lip service (I didn’t know you had them on your bottom but there you go) to consultations so it is pretty much pointless replying to them. I replied to the FSA paper on “Consumer Responsibilities” 4 years ago, only to then read the report which effectively said that consumer responsibilities to check things periodically (i.e. within timebars and subject to a longstop) were “out of scope” of the paper. I.e. it’s too political so we will not even discuss it in case someone confirms we acted ultra vires.
    As a result we drafted our Client Agreements to make sure the consumer knew they had both right AND RESPONSIBILITES, 4 years later, the FCA finally got round to asking me for a further copy of what the document actually said and after some threatening letters from them and a complaint back about their staff in return, we now await an apology from them.
    Extrat of our letter to them
    Next Steps
    14. Given that the “main concerns” and “other concerns” as listed in your letter of 06 November
    2013 have already been dealt with by the firm taking a proactive approach to continually
    evolving its Terms of Business, you will appreciate that the firm does not propose to make
    any substantial amendments to the version provided on 09 October 2013. Nevertheless, the
    firm would of course consider any amendments to particular words, phrases or sentences
    where these are specified by the Authority, should you so wish to provide these. The firm
    has always been of the view that the broad tone and content of its Terms of Business is
    consistent with any regulatory obligations and has always sought constructive input from
    the Authority.
    15. To be clear, if you are undertaking to review any document to ascertain whether or not it
    complies with your “regulatory requirements”, the absence of you raising points, or you
    raising points that are then resolved, is the same as you confirming that the end document
    then meets your regulatory requirements. Whilst you may wish to play language games
    around why this might not be “approval”, the firm is nevertheless entitled to rely upon the
    results of your review should you undertake it.
    16. The penultimate paragraph of your letter of 06 November 2013 claims that the letter is
    “confidential”. You do not however specify any particular provision supporting this
    statement, despite Mr Castle having asked you to cite one during our conversation of 24
    September 2013. Whilst my own view is that there is little merit in ever circulating copy
    correspondence, if the concern is that the Authority’s personnel do not wish erroneous
    statements or actions to be subject to adverse scrutiny, it may be instructive for them to
    take greater care in how matters are approached.
    17. I would in any event now invite you to treat the matter of whether the firm is using
    compliant Terms of Business as closed, or otherwise to bring the matter to a speedy
    resolution, and instead address the critical issue of how and why this issue was approached
    so clumsily and aggressively. I should reiterate that Mr Castle remains keen on a face-toface
    meeting should it be needed to clear up any remaining points.

    As you can see, there were 17 points to our response, the last few are more polite and mention no names of staff involved.

  4. I totally agree with Keith’s comment and suggestion for some form of transparent product/advice levy. We are constantly reminded that change is necessary to progress and why should the regulatory and FSCS funding be excluded from the need to evolve.

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