The FSCS, along with the Financial Ombudsman Service, offers a redress service of last resort. The FOS is the organisation that consumers can go to if they feel they have been treated poorly by financial services companies which reject their complaint. They can go to the FSCS if they are entitled to compensation but the firm is unable to pay the bill.Knowing that there is an independent person to complain to in the event of something going wrong, and that you will not be left out of pocket if the firm you were dealing with goes bust, helps engender confidence in the financial services system. It gives you peace of mind. That is why the financial advisers I spoke to last week in Scotland were broadly supportive of both organisations, especially the FSCS. They recognised that without it, people would be far less likely to seek financial advice and buy financial products. The fear of paying for a mistake is a big inhibitor. However, the problem lies in the cost of both services and who should pay for them. One adviser I spoke to told me that the FOS levy for his two-RI business is tiny. This is because, unlike many other IFAs, he has not faced complaints against him to the FOS. However, his firm’s FSCS levy is comparatively high – 2,300 to pay for other firms that have gone into default, leaving IFAs like him to pick up the tab. The growing number of endowment-related complaints looks like making the situation a lot worse. Even if the FOS only finds against IFAs in 25 per cent of cases, on average, that still leaves many advisers facing big bills. All it takes is half a dozen former clients to complain, out of the many hundreds that were advised over the years, and you will be several thousands pounds out of pocket, win or lose. With more and more IFA firms expected to go under in the next 12 months, mostly as a result of endowment complaints, it is easy to see how a small firm could find itself handing over a significant part of its annual turnover to the FSCS or FOS just to pay for consumers’ peace of mind. As it happens, the FOS is consulting on alternative funding systems, as Money Marketing reported last week. The main proposals are for an entirely levy-based system or a pay-when-guilty system. According to the FOS, if the funding system stays as it is – combining a levy with charging per case whether firms are guilty or innocent – the levy for a typical three-partner firm will increase by 40 per cent from 75 to 105. In practice, as things stand, three-quarters of the FOS’s funding comes from case fees, so moving to a levy-based system would increase overall costs for everyone. Even so, the increase in costs for small businesses would be fairly low, raising the prospect that instead of spending money on investigating a complaint, an IFA might dump it on the FOS. The alternative is pay when guilty. Under this arrangement, if the FOS finds for the complainant, the firm pays for the cost of the complaint. The implications is that the bill for an investigation would be much higher if the IFA loses. Some people suggest that the ombudsman could come under pressure to find more firms guilty in order to boost its income. I do not see this happening. What is more likely is that the number of verdicts in favour of complainants will stay the same, with the result that the amount payable will be greater in each case where the FOS rules against an IFA. The danger with this approach is that IFAs facing a big FOS bill will choose to go bust, shifting the burden on to the FSCS and forcing the adviser community to pay for their errors by other means. On the whole, I suspect this will not be a major issue. This is a generalisation but the available evidence suggests that firms most likely to go bust are not driven to the wall because they cannot afford one or two FOS rulings against them. What tends to happen is that they faced an avalanche of complaints and would have been unable to meet the bill for more than one or two of them. Having established that the polluter pays system is marginally better than the levy system, what of the FSCS levy? That remains far too high for most small IFAs. Here too, a number of proposals have been advanced as to how the system might be reformed, both by Aifa and other leading industry figures, including SimplyBiz chairman Ken Davy. I propose to come back to those ideas in my articles in the coming weeks.
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