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Leader: Why a product levy shouldn’t see the light of day

Justin CashNot a day goes by where we don’t hear of the injustice the Financial Services Compensation Scheme has heaped on advisers.

The good are paying for the bad, and in a greater magnitude than previously. That much is not in dispute. What is, however, is how to fix it.

The FCA had a pretty good look at this a few years back and took several options off the table. One was a so-called longstop on complaints to the Financial Ombudsman Service, where a time bar would be placed, say, 15 years after the advice event, following which a client would no longer be allowed to lodge a complaint.

The idea was that fewer firms would fail due to the redress paid out for historical issues, leaving less liability to fall on the FSCS (which deals only in defaulted firms, remember, while the FOS deals in live ones).

Personally, I think it was wise to take a longstop off the table; it’s a minor issue when you consider how few complaints from that long ago actually reach the FOS, the tiny proportion that are successful, and the fact that current rules would
ban the majority of complaints just six years after a client could reasonably become aware of the unsuitable advice anyway. (And, of course, the bulk of advice firms don’t actually pay a penny towards the FOS’s upkeep, when it comes to case fees at least.)

However, it is definitely still worth focusing our attention on the FSCS. Along with the longstop, a so-called product levy – where consumers would contribute to the cost of compensation through a slight premium on purchases – was taken off the table too. As we’re still scrabbling for a solution to the FSCS’s woes, is now the time to resurrect this solution?

The fight for a fair FSCS: Is a product levy still dead on arrival?

I get the appeal of risk-rating the product levy; you could force customers who wanted to take more risk into some form of caveat emptor, whereby they would pay a couple of extra basis points for the privilege. If the bar was set high enough, advisers recommending esoteric investments would be priced into dealing only with a narrower pool of clients. It would certainly spread the funding pool wider, while taking the weight off IFAs’ shoulders.

But I still have reservations over what it says about advisers as a profession when consumers are asked to pay for the cost of their own compensation. Not only has the client been sold a pup, they’ve had to pay extra for it too.

It doesn’t matter if – as the likes of the Personal Finance Society campaign for – such a levy would be seven basis points or fewer. When it comes to rebuilding trust in the advice profession, it’s the principle that matters: consumers shouldn’t have to pay for the mistakes of rogue advisers.

Honest advisers shouldn’t have to pay either, but a product levy isn’t the answer.

Justin Cash is editor of Money Marketing. Follow him on Twitter @Justin_Cash_1


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There are 5 comments at the moment, we would love to hear your opinion too.

  1. Justin, a fair article but surely clients always pay the compensation bill for those who deserve restitution. It is just the method that is used to obtain the cash that may differ. Currently it is simply added to the bill of every client through increased fees to cover the business expenses of IFAs of which the FSCS levy is part.

    • This argument is made every time FSCS levies come up but how true is it?

      If the cost of the levy is passed on to clients through adviser charges, as the levy changes every year, how many advisers adjust their fees up and down to cater for this.

      How many would reduce their initial or ongoing fees if the levy were reduced. I bet it isn’t many.

      • Justin …adjust up or down, i would argue levies are a constant with an upward trend

        Coming down or even being nil, just won’t happen.

        If advisers like me budget forward upto 5 years, one measures historic movements, only a fool trips up on something behind them.

        With the rate and amount of money being lost to scams and poor regulation, there will be plenty of levies for the next 5 years …

  2. (And, of course, the bulk of advice firms don’t actually pay a penny towards the FOS’s upkeep.)

    Sorry but this is incorrect.

    Every firm pays towards FOS as part of their annual fees. It is a relatively small amount and it doesn’t cover the entire cost hence the case fees.

    It is however a specific fee towards the cost of FOS.

  3. You are misunderstanding the fundamental economics of advice. Clients pay for everything. The only thing you can control is the shape of that payment. Currently they are paying a significant risk premium as firms pad this because of the risk that it could all come crashing down. In industries where business risk is low margins are also low. In industries where business risk is high, especially where there are some nice educational moats against recruitment margins are also high.

    Financial Advice has a nice high moat for new entrants, and high business risk, and consequently margins are high. Lower the business risk and over time margins will narrow. So it is worse than ‘clients are paying the FSCS levy’ – currently by paying through advice fees clients are paying twice. Once for the actual levy, and once for the perceived risk that advisers feel from dealing with regulation.

    Stick it in the product (all products, not just high risk products), and make it an absolute requirement that the product include the product levy reference number in its marketing, and have a register of those products that are included in the levy and you have a nice transparent relatively low cost way for clients to see whether they are covered by the FSCS, and for regulators to inspect all products as part of the registration process.

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