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