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MM Leader: Urgent action is needed for a fair FSCS

The huge Financial Services Compensation Scheme interim levy bills which landed last week again exposes a regulatory system in desperate need of reform.

The latest £93m interim levy, mainly due to claims relating to Lifemark, means intermediaries will pay £1 07m this financial year in FSCS costs on top of the £11 Om that was paid last year.

The bills, which must be paid within 30 days or in instalments using an FSA credit arrangement, will have a major impact on profit figures for many IFA firms who are paying a heavy price for the failings of others – principally regulators which failed to pick up on issues with Keydata earlier.

Advisers already stretching themselves to abide by FSA demands to increase qualification levels, restructure business models and increase capital must put their hands in their pockets again to mop up the mess other people have created.

Consumers must have confidence they will be given an adequate degree of protection if they are miss old a financial product. But advisers, and those looking to invest in the sector, must also be given confidence that, year after year, they will not continually be made the fall guys for the latest financial services scandal.

The review of FSCS funding, promised by the FSA last year, has been postponed due to the regulatory shake-up but this issue should be made a priority for the Government and regulators.

Policymakers must look at overhauling the current sub-class categories, in particular, redefining the criteria for the intermediary sub-class, whilst retaining the important cross-subsidy requirement for providers to support distributors in the event of a large failure.

Perhaps a more fundamental reform of the compensation structure is needed and more radical ideas, such as product levies or insurance, should be explored.

As the Government continues its work on living wills for banks, debate is also required on ensuring advisers and other “intermediaries” do not leave behind a considerable mess for the rest of their sector to clean up.

The current polluters’ competitors pay model for compensation has been stretched well beyond tolerance levels in the advice sector. Advisers cannot keep paying such a high price for the failure of others.

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Comments

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

  1. Well said but sadly it will make no difference as this Government, The Treasury and the FSA have demonstrated time and time again they have on intention in listening to reason or alternatives.

    It may well be the only way to get them to listen is to demonstrate outside the FSA as it seems sensible dialogue is a complete waste of time as even the Treasury Select Committee are finding out.

  2. The key part if this article is “The review of FSCS funding, promised (promised, mind) by the FSA last year, has been postponed due to the regulatory shake-up.” Many will perceive this to be yet another example of FSA mendacity.

    We seem to be reading pretty well every week of yet another new “initiative” dreamt up by some committee or other within the ivory tower of Canary Wharf. Most of them are just more unnecessary bureaucratic hoops and hurdles for IFA’s to have to jump through and over, yet more attempts to fix what is manifestly not broken..

    If the FSA wanted to, it could put the brakes on this never ending stream of additional requirements and instead allocate its resources to a root and branch overhaul of the FSCS funding system.

    But it doesn’t, preferring instead to keep piling on the miles of red tape as part of its plan to inundate the already punch drunk IFA sector whilst at the same time battering us into insolvency with all these perniciously engineered special FSC levies.

    The reason investors lost money on KeyData products was the failure of LifeMark the provider (which held the assets), not KeyData the intermediary (which didn’t). Ergo, any special levy should fall on other providers, not intermediaries. Only the FSA refuses to accept this simple logic, thereby reinforcing the idea that the FSA is out to destroy the intermediary sector, by fair means or foul ~ mainly, it seems, the latter.

    And has the FSA deigned to offer any response to these calls for urgent reform? Not a bit. So much for openness and transparency.

  3. The FSCS is broken, the FSA is a discredited failure, the FOS is a laughing stock. This fools paradise costs the industry billions of pounds with no benefit to anyone. In Parliament any attempt to redress the balance against an unaccountable and dangerous regulator is met by FSA stooge Mark Hogan.

    IFAs do not need to be regulated. The packaged products they advise on do. Product levy paid by consumer to protect consumer. Job done.

    Oh yes, GET RID OF HOBAN.

  4. A demonstration outside the FSA offices is a damn good idea. It would at last catch the attention of the media and if we could all bring some clients along to express their views on how those inside have protected their interests it would have some considerable impact.

  5. Let’s start at the beginning. The FSCS is in fact a Ponzi scheme – and a government approved one at that. Perhaps Madoff should run it?

    Anyway what is manifest is that it is not well funded and therefore constantly struggles to carry out what it is meant to do – compensate those who (one way or another) have been ripped off.

    What the present levy system – notwithstanding press hyperbole – amounts to is (very approximately) 1% of turnover. If a firm can’t generate enough profit from 99% of turnover there must be something very wrong. If they are being levied for significantly more than 1% there also must be something wrong.

    I’m not defending the levy. It is a very irritating and unjust system – but then so is my Income Tax – which is rather larger. In both cases I’m supporting the feckless, but at least with the FSCS levy I do get a 40% discount – thanks to Mr Osborne. Those who are incorporated will get almost a 30% discount. So let’s start to be sensible.

    For those of you with five figure sums to pay I guess you have several RIs – so if you divide your liability by the number of advisers it starts to look a bit more manageable – no? Why shouldn’t individual advisers contribute on occasions such as this (which I hope are exceptional). Sole traders pay out of their pocket and many RIs are deemed to be self employed. So share the pain!

    These costs are then built in to our business and ultimately paid for by our customers and clients. This is where it gets silly. So those we are compensating in effect pay for the compensation themselves. But that is how tax works!

    So what could be more sensible than to impose what many have already suggested – a product levy?

    Bear in mind that the Treasury has no scruples when it comes to imposing an Insurance Premium Tax – so why not one for our branch of Financial Services – but this time not going to the usual Westminster waste, but to safeguard the very people that the Regulators and politicians are forever whining about. As you can see from the foregoing they pay for it anyway!

    What also needs to be done is to ensure that the expensive paper shufflers from the big four accountancy firms have their noses firmly out of the trough. Paying their hugely exorbitant fees is like pouring petrol on a bonfire.

    What we need to hear from the ‘great and the good’ is WHY NOT a product levy. That would be interesting.

  6. Well put Harry

    A product levy has to be the solution in my view and the product levy could also be used to demonstrate the risk associated with any product as a higher levy would indicate a higher risk etc so again this could help the consumer.

    The idea of a product levy that also inclused some sort of insurance cost may also be a solution.

    A product levy also makes it a fairer system and more open method for all to see especially the consumer who as you say ultimately pays the cost.

    I faile to understand how we in the financial services industry have to pay of the costs of mistake made in our indiustry to protect consumers, but those who work in the NHS DO NOT pay for the £15 Billion bill currently budgeted for for the mistakes made by those in the NHS which is of course paid for by the tax payer.

    Why should not all those who work in the NHS not pay towards the costs of their mistakes like we have to? it may also help to reduce the mistakes if they all know they have to pay for them?

    “Justice, fairness and responsibility”, is what the Queen said her Government would provide or to out it another way what Mr Cameron and Mr Clegg said they would give us, so lets have some of it please and now as it is nearly 9 months into their term of Government.

  7. Having just received my paper copy I see that there is a lot of space devoted to this topic – quite rightly.

    However there are a couple of additional points that arise. Martin Bamford and Tony Byrne, both first class IFAs I’m sure, seem to have overlooked one vital point. Under RDR we are now more or less compelled to consider these products if we are to retain the Independent title. I concede that it does not necessarily mean that we have to use them. But therein lies the rub. How do you know that the Regulator won’t take issue with you eschewing these products? Will that put your independence at risk? Will you therefore be shoehorned into being a Restricted ‘Adviser’? (I put adviser in this case in parenthesis!)

    Tony Byrne is right to take issue with Peter Smith. I have listened to him on several occasions. I have concluded that he is to emollient and diplomatic interaction what Ghengis Khan was to social work. He seems to me to be bellicose and aggressively disparaging of IFAs in general and seems to seek wherever possible to cast us in the worst possible light. Paranoia? Am I being too sensitive? Well I guess we’ll find out if he steers the new proposals through the new regime.

    As to apportioning liability to those who have been judged to have used the ‘risky’ products. This really is entering murky waters. It will give leverage to regulation by hindsight. Think of Zeros. Lauded as low risk on the Regulator’s web site. But not all Zeros were toxic – some indeed were (and still are) quite good and a useful tools. Under these proposals, perfectly good IFAS who had recommended perfectly good Zeros (as opposed to the incestuous ones) would be (unfairly?) clobbered.

    I’m afraid some of these comments have – understandably – been knee jerk reactions.

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