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MM leader: FSA wrong to reject an FSCS product levy

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.

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Comments

There are 7 comments at the moment, we would love to hear your opinion too.

  1. Firstly, I think the intended word in the second paragraph is exacerbate rather than exasperate, notwithstanding that IFA’s are certainly exasperated by the FSA’s typical intransigence on this issue.

    Secondly, the FSA doesn’t really “argue” or put forward “arguments”, as if there might be any scope for negotiation or modification of its stance on any particular issue, does it? That would be consultation which, as we know, is something in which the FSA doesn’t actually engage in any meaningful sense of the word.

    Rather, the FSA merely announces how things are going to be and then brushes aside all objections on the basis of This is the way we see it, so you’re all going to have to like it or lump it. End of. Isn’t that about the measure of it?

    And doesn’t such an arrogant and intransigent highlight yet again the need for an Independent Regulatory Oversight Committee with the unassailable authority to say to the FSA This is wrong and you’re going to have to find another way that takes proper account of the legitimate concerns of those affected by your proposals?

  2. “Independent Oversight Committee”!!!

    Don’t make me laugh, the regulator is not accountable for its actions cannot be sued for professional negligence, has no interest in maintaining and sustaining a profitable Independent sector and just wants rid of us pesky and irritating IFAs so that the governments NEST scheme will be the pension scheme of choice, direct providerss, cost comparison sites, banks and building societies will be the main provider of financial products thus eliminating any claim of mis selling as clients will have to buy the products without advice.

    There ! Simples ! Job Done !

  3. A product levy is still flawed. There needs to be an advice levy. Our last FSCS invoice meant that we paid circa £2,000 for life and pensions. £10,000 for investment block.
    Post RDR we give advice. It will all be under life and pensions. No-one can prove otherwise since client pays a cheque. Think of the huge saving for us.

  4. Sams right, but I think its just terminology. Advice IS effectively already a “product” for the purposes of the FSCS levy, so quite why the FSA thinks a prefunded “product” levy could not include “advice” is baffling.
    A product (including advice) levy approach solves so many of the problems that the current system (even with amendments) doesnt solve. It also adds great benefits.

  5. The product is often (but not always) a method for paying for advice. Investment income is used to pay for protection and/or pension advice, unregulated advice, mortgage advice, GI, tax and trust advice. There is no relationship in our firm’s business between advice area and the blocks. Worse still, we can manipulate the system, the FSA are no wiser and other firms can pick up the bill. What do we do if we invoice a client and receive a cheque? Life and pension revenue ta. Timesheets prove it. Oh yeah?

  6. Gareth E K Smith 2nd August 2012 at 10:40 am

    Under RDR I might be a bit more transparent and say the fees to a client will be X. I will then break this down further by saying so much is for the FSA fees, I will calculate this to be the % of my fees that i paid the previous year, I am also going to charge a small product levy for future FSSC claims and leave this money separate and finally the remaining part of the invoice will be for my Business to pay the running costs etc.

    When i get a compliance visit i will show them that quite clearly the FSSC is being levied on the consumer.

  7. To Ned Naylor ~ What’s to laugh about with my proposal for the creation of an IROC? The very reasons we need such a Committee are all the examples of unaccountability that you cite.

    The TSC tries from time to time to hold the regulator to account but its major shortcoming is that it’s able only to ask questions. It has no authority to direct a change of stance or policy if it considers unsatisfactory the answers it receives in response to those questions. In March last year, Hector Sants told Andrew Tyrie that the FSMA 2000 affords the FSA free rein to do pretty much whatever it likes and the only way that can be changed is if the TSC gets the Law changed. The government has stated that the FCA, like the FSA before it, will be accountable only to its own board.

    For its part, all the TSC has been able to do is to try to put the brakes on the rate at which the government is hustling through the reforms to the FSMA. But the TSC doesn’t actually have any powers whilst, on the other hand, the FSA clearly has far too much power, without accountability, and Adair Turner is forever calling for more.

    Lack of accountability is the root of most of what’s wrong with the present regulatory system and it’s on this issue that we should all be campaigning by way of our MP’s.

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