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Martin Bamford: A better way of FSCS funding

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“It’s all wrong”. This running joke at our office is based on a regularly occurring statement made by a former financial planner who would often exclaim everything was incorrect with a piece of work. When overreactions and blame are your speciality, it is easy to turn a drama into a crisis.

But as I look at our latest Financial Services Compensation Scheme interim levy and news of a 10 per cent hike in our regulatory fees this year, I risk the mirth of my team as I say for myself, it’s all wrong! Here we are in 2015, and despite a much better regulatory regime than we had before, we are still being stung by foolish advisers recommending inappropriate products to greedy or naïve investors; products which inevitably collapse and leave us picking up the tab for compensation. 

I don’t get angry much anymore. In fact, my life view is based around peace, love and forgiveness. Honestly, it is. So I feel a crushing sense of disappointment instead at having to pay another compensation levy and even more towards the running costs of the FCA in the future. It’s all wrong. 

I have tried in the past to petition the Government and regulator for reforms to the FSCS funding system. It needs to be based on the concept that the polluter pays, so advisers flogging esoteric schemes which are clearly doomed to fail have to tack on some extra fees. These fees eventually get paid back to the investor when they claim their money back. Seems fair to me.

The little reform we have seen since that petition gathered over 1,000 adviser signatures seems to have resulted in little meaningful change. The main annual levies are based on longer-term funding expectations, but have not prevented an emergency call on our bank accounts. Please, sir, I want some more. The FSCS also still refuses, by choice or stubbornness, to recognise the valuable contribution made by advisers and others to their funding.

Something needs to change and here is what I propose.

First, the rules need to ensure that only authorised and regulated investment funds can be sold by authorised and regulated advisers. None of this Ucis nonsense. It is totally unnecessary for 99.9 per cent of retail investors and anyone who wants or needs to invest in a hotel complex in South America can do without any FSCS protection.

Second, scrap these levies on advisers and instead tack on a product levy, structured so higher risk products attract a higher levy. If this is a leap too far, perhaps the FSCS could adjust its levies so firms selling high risk products (the FCA knows who they are, we all know who they are) pay significantly more towards FSCS funding than the rest of us, who are quite frankly boring about what we recommend to our clients.

Finally, we need a much bigger role for our professional bodies in policing adviser standards. This was a big missed opportunity when the RDR was introduced along with the requirement for statements of professional standing. Professional bodies, along with local champions from the adviser community, could easily enforce self-regulation to identify high risk product sales early and ensure consumers are not placed at risk of ever needing compensation.

What cannot happen is for the status quo to continue. It’s all wrong at the moment. It needs to be put right.

Martin Bamford is managing director at Informed Choice

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Comments

There are 27 comments at the moment, we would love to hear your opinion too.

  1. Spot on, I agree 100%, we need a journalist to put this to FCA/FSCS

  2. Thank you, Alan.

  3. Given that the FCA refuses to explain just what, if anything, it does with all the data gathered from the periodic RMA returns it forces intermediary firms to submit (no transparency or openness there then), on what basis are we to assume that it knows just which firms are selling high risk products?

    The fundamental principle that that only authorised and regulated investment funds should be sold by authorised and regulated advisers already exists, more or less, in that few if any PII policies cover the sale of UCIS and other unregulated investments. Yet far too many intermediaries have for years been selling them anyway. Were the FCA remotely on the ball and bothered to examine the RMA returns, it would pick up on such sales and demand sight of the firm’s PII policy. If said policy doesn’t cover the sales of such products, the firm would be in breach of its regulatory obligations and would therefore be subject to appropriate sanction or, at the very least, to an order not to sell any more. So what we’re paying for are the consequences of the FCA failing to do its job properly.

    I agree that a point of sale/purchase product levy would be fair but this has been proposed many times before and, as ever with no convincing explanation, has always been rejected. What’s likely to change this time round?

  4. Good article Martin and Im with that 100% – I don’t think you get many who disagree with your view. Unfortunately the powers to be simply seem to refuse to accept a product levy as a suitable way to move forward with. For what is worth, one thing I am looking towards implementing later this year is uplifting my fees to include a regulatory/FSCS fee and show this broken down clearly in the fee agreement. The level of the uplift is still under consideration but Im thinking in the order of 12 to 15% so clients can see exactly what sort of costs I incur. As the costs or regulations increases so will my percentage. It is a ridiculous situation we find ourselves in but until we get this “regulation problem fixed” I cannot keep taking more and more of my turnover out of my business to simply pay for increase regulation and FSCS costs.

  5. Well said, we’re a firm that firmly believes that 99% of clients in general (100% of our clients) would not feel comfortable with an unregulated product. Why should we then pay for the failure of these products?

    At the moment there is not financial incentive to sticking to the rules. Struggle by adhering to the FCA’s guidelines or make a fast buck flogging unregulated investments and phoenix when the bad press catches up.

  6. Well said Martin.

    The idea of a product levy alone may be deemed unworkable, as there are so many other forces which suck firms into administration and create claims under the scheme (God help us if a bank folds!), but we should certainly have more influence over our fee band and its scope and there is definitely a need to push some of these costs onto products, after all, that is what happens in every walk of business without too much issue.

    I make a point of explaining to every client, old and new, about the background as to who (and how much) we pay in various levies and also about our seemingly open-ended liability and it is fair to say that clients are genuinely astonished at the scale of what we have to bear and what they are expected to pay for, as a whole, through their fees. One thing is for sure, they don’t blame me for the cost of their advice!

  7. Martin you state; “Here we are in 2015, and despite a much better regulatory regime than we had before” …..well that is highly debatable !

    That aside I do agree totally with you and the other posters comments, only to add (I suppose to your statement above) I find them (FCA) very weak and confused !

    George Osborne walks in nicks Martin Wheatleys (our) dinner money to the tune of 1.3 billion, when he has no real right to, this money is meant to ease the regulatory burden on our clients and cost to the industry, now we have a never ending cycle of the good paying for the bad, as the bad’s fines go straight to the treasury (have we yet had clarification that its gone to the intended recipient NHS or the armed forces ?)
    There are two major issues here 1) the cost of the regulator and its off shoots FOS, FSCS and MAS are way to high, by a 3rd I would estimate, and 2) the fines it collects on wrong doers should be retained to fund and compensation claims via the FSCS !

    I would like to see tripartite regime (if you will) industry fees, product levies and full retention of fine money for the use by the regulator to fund interim levies or reduce costs.

    Oh and as an extra; total ban on bonuses to all regulatory staff, and an outside committee to set budgets, its wrong this is done in house

  8. The point is well made Martin, as are some of the comments that follow.

    Whilst the concept of insurance is understood in that we all put into a system to allow genuine claims to be paid the regulator and its compensation offshoots seem to have missed the point. The simple analogy is car insurance, if you pose more of a risk you pay more – lots more!

    Also bearing in mind the required level of competency an adviser we are required to hold to advise clients I find it hard to believe any of these esoteric investments are recommended unknowingly and therefore in breech of the indemnity insurance contract provisions which means that in the regulated world they should face personal fines and the criminal courts.

    It is unbridled greed from both parts that drives the problem, unscrupulous advisers who want a quick buck and clients that want a quick and high return, neither are without risk but until the risks are not worth it people will keep coming back for more and the rest of us PAY.

    The regulator is no different to the Government, keep taxing the law abiding masses (who are reducing in ability to pay) as it is much easier than dealing with the real problem!!

  9. I entirely agree with you Martin.

    This could even be voluntary. Firms could elect to advise on regulated investments only in return for lower FSCS levies. That would be easy to administer and police. If a firm that has made the election then advises on an unregulated investment the FSCS should be able to sue the directors personally for the compensation.

    Alternatively the FSCS scheme should state that there will be no compensation for anyone investing in unregulated products, even if they go through a regulated adviser. To me ‘unregulated’ means outside of the regulation system. At the moment unregulated seems to mean that you get the benefits and security of regulation without paying the costs.

    It is all wrong that those of us that abide by the rules pay for those that don’t and if it doesn’t stop soon many of us will give up I fear.

  10. Sounds like common sense to me

  11. @Soren – The irony is however that because of how warped the FCA made the new Independence definition post RDR, to remain Independent, we have to be willing to (at least) consider unregulated investments even if we (invariably) have no clients who they would be suitable!

  12. @ Soren
    I agree with you ref the UCIS and it is a fact the products are unregulated. However the regulators have managed to get a very clever way around this problem. They have previously justified getting involved and allowing the FSCS to become involved by stating that whilst the products themselves are indeed unregulated, the advice that lead to the implementation of same, most definitely was. Therefore it will fall under our their remit and clients get full protection of the system. It is a perverse situation to be in but unfortunately we are where we are

  13. While I agree totally with the tone and tenor of what Martin says, a fund based FSCS levy is not an easy option to manage. While fair and reasonable, what happens if it is underfunded or overfunded?
    The problem with the FCA is that they do not get their budget set by Government. If the MOD went to HMG and said we want 10% more the answer would be no. Country cannot afford it. When the FCA simply come back to us for more and we cannot say no.
    But let’s put this in perspective. This is about principle. Not cost. FCA fees and levies represent a relatively low percentage of our overall costs – 1 or 2%? It is a bit difficult to argue about the amounts when they are dwarfed by other factors – NI, Corporation Tax (which big companies do not pay), IT and the sheer cost of compliance which the FCA can do something about.

  14. @Phil Castle – your point about UCIS and independence confuses me.
    When the RDR was introduced, to remain independent you had to consider UCIS – basically a broader range of retail investment products. And my understanding is that the RDR related to retail clients. But you cannot sell UCIS to retail clients.
    So why do you have to consider UCIS to remain independent? Or have I got the wrong end of the stick – again?

  15. Quote1: ” … we are still being stung by foolish advisers recommending inappropriate products to greedy or naïve investors; products which inevitably collapse and leave us picking up the tab for compensation.”

    Quote2: ” … scrap these levies on advisers and instead tack on a product levy.”

    If Quote 1 summarises the problem, does Quote2 (even if set on a heirachical basis related to risk) provide the solution?

    Can you see any politician advising the public that to resolve the issues raised in Quote1 it is to be resolved by every member of the public being asked to pay, no matter how finessed as described in Quote2 – via any form of product levy, whilst announcing that IFAs will no longer face any levies?

    Martin, you are edging closer to solutions with your other suggeestions, but imho need to be even more radical.

    Here is an article where I offered some random thoughts about a debate on more radical grounds and thinking:

    http://www.moneymarketing.co.uk/a-radical-solution-for-fscs-funding/1025479.article

    Let me expand on those by referring to an article (in another trade paper) where Mark Neale makes reference to the PI market being a “broken reed”, and offered these comments:

    ” … ‘The problems are structural. It’s something the industry itself should be concerned about, because it’s significantly increasing the risk that the cost of failure will fall on the industry itself rather than the insurance policies held by individual firms,’ said Neale
    .
    “The industry itself has a strong interest in addressing this problem. After all, if the consumer can’t recover from the firms’ PI, they will come to us. If we can’t recover from the firms’ PI, then those
    costs will fall on the industry through the levy.’”

    Additionally this appeared in the article: “While he is often the bearer of bad news for advisers, he has previously said he was sympathetic to risk-based levies rather than the current sub-class system. He has repeatedly said the scheme was open to the idea on reforming its funding.”

    So suggestions:

    1) Engage with Mark Neale starting on the question of PI.

    2) Consider whether IFAs could establish a “Mutual Insurer” – backed by adequate Re-Insurance.

    3) Establish within such a regime (with the assistance of the IFAs and any Re-Insurers) the degree of risks, and establish a “price” to be borne by the ultimate consumer as their insurance for any eventual potential default.

    4) Consider going further than the established FSCS limits of cover (again based on the degree of assumed risk).

    I could add more – but to me the essential requirement is to engage with Mark Neale as your starting point, andf I hope some of my thoughts assist.

  16. @Sam Caunt – Until a consumer walks through the door, we don’t know if they are a retail client or not. If we say we will only advise retail clients, I assume that is a restriction and would make us restricted? I have only taken on retail clients and we assume they are such and our client agreements say that unless we agree otherwise.
    As I understand it, the Independence definition (as it stands) is that we simply have an open mind when the consumer comes through the door… the moment they come through it things change. If they don’t walk through, then we need to address the need as to how to meet a potential disability, if they explain they are hard of hearing or registered deaf, we need to address this. We are placing no restrictions on a consumer before they walk through the door… we may have preferences and aversions, but not restrictions.
    I think UCIS will be unsuitable for the vast majority of consumers and structured products are only suitable for a limited number of consumers, but I never say never BEFORE I meet the consumer in order to maintain my independence.

  17. To the best of my knowledge, UCIS are not a ‘retail investment product’ as defined by the FCA, so don’t come into the test of ‘independence’. I’m happy to be corrected on this.

  18. @Martin Bamford
    Most, if not all, UCIS will come under the definition of retail investment product. It is caught under:

    “any other designated investment which offers exposure to underlying financial assets, in a packaged form which modifies that exposure when compared with a direct holding in the financial asset;”

    As such, someone holding theselves out as independent must include UCIS in any consideration of investments for a client. As Phil has pointed out, UCIS and all other RIPs must be in the potential list of investments before the client walks through the door. This is the only test. Indeed, you are welcome to claim independence even if you exclude advice on pension transfers, long term care, direct investments (equities and debt bonds), IHT, etc. On the other hand, an adviser who offers all of these and all RIPs except Outer Mongolian Unit Trusts (yes, they exist) would have to declare themselves as restricted.

    I’m sure all advisers and clients have no problem understanding any of this, it being clear, fair and not misleading…

  19. The problem was Martin that we were obliged to consider UCIS if we wish to hold ourselves out to be independent – FCA website states this somewhere – but they then stopped us from selling to retail clients to which the independent term applies. We treat all clients as retail clients as this provides the highest level of protection. You could argue that we are not independent because we treat all customers as retail clients but that I think is daft. And because we do, our levy should be lower…..

  20. @GA – Thanks, that’s what I thought and hence why my starting point is to say “don’t knock it until you’ve looked at it for a specific client”, once you have and conclude that making a loss for them will NOT be of any benefit, you can or that Outer Mongolian Unit Trusts are not suitable for their attitude to risk, we can close it down as an option.

  21. @Sam – we treat all client as retail clients unless we agree with them otherwise, that is NOT a restriction, it is a protection for the consumer. As a firm, we only currently have retail clients however.

  22. @Sam Caunt

    What fun! We treat all clients as retail clients, and therefore UCIS are never suitable for them. I personally don’t believe the FCA would ever threaten our independent status because we take the view that UCIS is generally unsuitable for the clients we work with. At least I hope they wouldn’t! I hope they would have far more important priorities to address!

  23. @Martin Bamford
    You can’t automatically exclude consideration of UCIS for retail clients and claim to be independent. The requirement is to be ‘unbiased and unrestricted’ regardless of your personal views.

    But you are probably right that the FCA have more important priorities…

  24. COBS 6.2A.3
    A firm must not hold itself out to a retail client as acting independently unless the only personal recommendations in relation to retail investment products it offers to that retail client are:
    (a) based on a comprehensive and fair analysis of the relevant market; and
    (b) unbiased and unrestricted.

    Some compliance consultants should note!

  25. FSA FG12/15 – Where we have identified high-risk products and recommended that they should not reach retail investors in the UK, a firm would not need to consider them for its clients to meet the standard for independent advice.

  26. @Regu Lation
    Nice try but wrong context.

    FG 12/15:

    “If a firm cannot or will not advise on a particular type of retail investment product, and that product
    could potentially meet the investment needs and objectives of its new and existing clients, then its
    advice will not meet the standard for independent advice.”

    The wording you quote follows this but it has a footnote. That footnote makes it clear that the wording refers to a specifc product NOT a whole product class such as UCIS. The example given is traded life policies.

    It may be stating the obvious but rules trump guidance.

  27. The Regulator has created this problem by creating this ridiculous definition of what constitutes an independent adviser. If it were not a requirement to consider unregulated products in order to maintain the independent tag then only those advisers who chose to consider such products would advise on them. AND if such people did that then they should be pursued for bad advice by a lawsuit NOT regulation. And they should have to take out a second PI policy which covers unregulated products and services. Unregulated PI policies should be underwritten and priced in their own right and should not infect the premiums and underwriting on PI insurance for regulated activity. If they cannot get the cover then be it on their own heads to recommend these kind of investments. Regulation is too often used when Legislation should instead be the recourse for misled or missold products and services. All of these answers are too conditioned by the framework we have been forced to think within. What is needed is for regulation in the UK to have its wings clipped and to be answerable to parliament. People making claims against advisers who are regulated and who give advice on regulated areas/products should be able to go to the Ombudsman still, but there are too many cases of good honest advisers and adviser firms having to fork out levies for cases which should simply not be covered by regulation. There are laws in this country to forbid misrepresentation of products and services, there are advertising standards and there is a trades descriptions act. But there is also a principle of caveat emptor. SO those people who buy unregulated products should beware and understand that they cannot go to an ombudsman because they will have the protection of the law of the land instead.

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