Eye-watering Financial Services Compensation Scheme levies have become the new normal, with no end in sight to the huge sums that advisers and their clients are paying for the failings of others.
Following last month’s £60m interim levy for investment intermediaries, creating a total levy for 2011/12 of £82m, the FSCS last week announced a new levy of £38m, spread across pension and investment advisers, to compensate Arch cru victims.
A £34m levy for investment advisers for 2012/13 has already been announced and, given the investment scandals recently uncovered by Money Marketing, we may well see further payments required during this year.
Compensation payments for 2010/11 breached the £100m limit for investment intermediaries while the limit was nearly reached the preceding year.
The FSCS model is broken but the signs for a more progressive system are not good.
The FSA has pledged to finish its FSCS review later this year, despite the current deadlock at a European level over two compensation directives that are likely to affect any UK reforms.
New FSA compensation rules that allow the FSCS to pay compensation without investigating whether the claim is valid in certain cases is likely to see an increase in spurious claims and industry costs.
FSCS chief executive Mark Neale has already spoken out against a product levy, despite this appearing the most sensible way of ensuring retail clients are not constantly subsidising failures in more risky areas of the market. Alongside FSCS reform, questions must be asked about what more the regulator and the industry can do to stop the misselling that creates the need for big payouts in the first place.
Many recent scandals have involved regulated advisers using unregulated collective investment schemes. The FSA has issued strong warnings that Ucis are unlikely to be suitable for most investors. It is consulting on an effective ban on promoting life settlement funds to retail investors as part of its current Ucis review and, given the poor practice being exposed, this thinking may be extended across Ucis activity.
A separate FSCS subclass for those advising on risky areas such as Ucis may be considered – a move likely to significantly increase the cost of such advice.
A major overhaul of the compensation system alongside a tougher regulatory stance looks the only way that compensation costs for IFAs and their clients are going to be eased.