For several years now advisers have been calling for reform of the Financial Services Compensation Scheme to offer a fairer deal for their clients and the IFA sector.
Unfortunately the reforms announced by the FSA look set to exacerbate, rather than correct, the unfairness in the current system.
The FSA wants to increase the annual ceiling of the investment intermediary class from £100m to £150m. With high levels of claims predicted, it is likely adviser bills will continue to increase.
The regulator has ignored calls for certain advisers to be seperated from spread-betters, stock-brokers and other risky areas, warning that a such a move could compromise the stability of some of the sub-divided sectors.
However, the FSA does not seem too worried about the effect of increased costs on the stability of the IFA sector. Proposals to create a more adviser-focused class by moving certain activities into the investment fund management class were rejected.
For adviser firms that have seen huge increases in FSCS bills over the past few years, the FSA’s arguments will be difficult to swallow.
Money Marketing has campaigned for some time for an upfront product levy to play a part in funding the FSCS, but the idea is rejected in the regulator’s consultation paper.
The FSA argues that it would be difficult to objectively risk-adjust the levies depending on product type. We agree this would be tough, but not impossible. Recent history should give plenty of clues as to where the risk lies.
The regulator also suggests a product levy would detach the adviser from funding the FSCS and would require legislative changes that would need to fit in with European regulations that have yet to be finalised.
We believe a product levy would offer a much fairer and transparent method of funding the FSCS. At present costs are often passed down to consumers via extra product and advice costs, with IFA clients in particular subsidising risky areas of the market where they are never likely to invest.
A product levy would fit in well with the RDR rules, which state that costs should be explicitly set out to the investor, and end the current system of cross-subsidisation. It would also give investors an appreciation of the costs of the guarantees they have been given.
A brave, radical and forward-thinking regulator would be pushing the Government and Europe to introduce a product levy in the UK.