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Levy is at breaking point for ifas

James Sakmon looks at the impact of a big rise in FSCS fees.

The Financial Services Compensation Scheme has warned IFAs to brace themselves for a hike in the levy due to a predicted threefold increase in endowment claims.

In January, the FSCS forecast 7,000 endowment claims for 2005/06, but says it is now expecting to receive 22,000 during that period. This means advisers can expect another dramatic rise in fees next year. The news is particularly galling for advisers who thought the worst of the endowment scandal was behind them. The fact that the 37.4m levy on IFAs for 2005/06, itself a 50 per cent increase on 2004/05, will not cover this year’s compensation payouts will put further pressure on advisers’ finances.

Anand Associates director Bhupinder Anand says: “I have never had an endowment complaint against me and I resent having to pay for the mistakes of other advisers that might not have done things by the book.”

Advisers could also have to pay an additional levy to cover this year’s shortfall although the FSCS, which is hiring new staff to cope with the increased volume of claims, says this is unlikely.

The shortfall would have to exceed 25 per cent for an additional levy to be necessary and the FSCS is forecasting that the shortfall will be within the 10-25 per cent bracket. If this is the case, it will use its reserves to pay the difference.

FSCS chief executive, Loretta Minghella, says: “New endowment claims have been received at unprecedented levels, way beyond our expectations. We do not currently think it is necessary to raise a further levy for endowment claims in the financial year. However, we are keeping a close eye on the level of funds available. There may come a point where a levy has to be raised.”

Scaremongering in the media, reprojection letters sent to consumers and claim firms are all blamed to varying degrees for the unexpected surge of endowment claims. However, the number of endowment complaints to the ombudsman, which represent two-thirds of its workload, has remained consistent with last year. The number of complaints against IFAs has increased slightly.

Aifa director general Chris Cummings says: “This is a vicious circle. As fees go up more firms go out of business. This means there are fewer IFAs there to pay the fees and the costs go up for the remaining firms, driving more firms out of business.”

IFAs will now be pinning their hopes on the FSA’s review of the FSCS funding structure. This was prompted in the first place by the reaction from the IFA market to the FSCS fee hike this year, compounded by the withdrawal of provider subsidies. The argument that IFAs are shouldering too much of the burden for endowment misselling and that the costs of compensation should be spread more evenly across the industry has been given fresh impetus.

Even FSCS spokeswoman Heather Tilston acknowledges the need to scrutinise the way that the compensation scheme is funded. She also recognises that issues such as Lautro projections have made it more difficult to assign responsibility squarely with IFAs and says this is one of the issues that the FSA should be addressing. But she adds: “It is difficult to ask anyone else to pay for this as the claims are coming about advisers.”

Cummings says product providers need to take more responsibility for the endowment debacle and says subsidies from them should be reinstated in some form. He says: “This news brings the problems of how the FSCS is funded into sharp focus. Providers have to step up to the plate. IFAs are paying for endowments while providers still make money from these policies.

He adds that the predicted fee increases also demonstrate the urgent need for the FSCS to ringfence liabilities so that advisers entering the market do not have pay for mistakes made by others.

The increase in FSCS fees inevitably brings up the issue of Lautro projections. The Financial Ombudsman Service describes Lautro projections as a red herring but many IFAs think otherwise. The sense of injustice in the IFA sector is heightened by the FSA’s admission that it found 11 product providers in 2001 were misusing Lautro projections by failing to distinguish them clearly from their actual charges.

Mortgage Life & Pensions managing director Paolo Standerwick says: “There needs to be a full investigation into the ‘fictitious’ Lautro charges which all customers and advisers were duped into. These were all under the regulator’s guideline. Compensation payments are currently landing at the feet of IFAs when in fact it is not our fault.”

IFA Defence Union chief Evan Owen believes the FSA, not providers, needs to take responsibility for the skewed Lautro projections which he believes lie at the heart of the endowment misselling crisis. “The FSA, as Lautro’s successor, should finally accept the responsibility for these projections. They cannot keep passing the buck and blaming everything on IFAs,” he adds.

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