Mortgage sector fights for FSCS reform


Alternative funding models are beginning to emerge as mortgage brokers continue to rage against the cost of the Financial Services Compensation Scheme.

A survey conducted by Money Marketing sister publication Mortgage Strategy last week found that almost nine in ten brokers believe the lifeboat scheme is in need of reform.

A poll of 122 Mortgage Strategy readers shows 88 per cent believe it is time for a change to the way brokers are charged.

Currently, the FSCS categorises term assurance and critical illness protection as life and pensions business, grouping brokers with other wealth advisers.

This means that mortgage firms must help create a resource to fund compensation for issues such as investment scams through missold Sipps.

As a result of the recurrence of such claims, the FSCS levy for life and pension advisers trebled from £33m in 2014/15 to £100m in 2015/16.

“Right now the good firms are paying for the bad, and since the bulk of this cost is coming from Sipps, mortgage brokers feel that they are paying for bad investment advisers,” explains Association of Mortgage Intermediaries chief executive Robert Sinclair.

London & Country Mortgages director Pat Bunton adds: “We are becoming liable for failures in a category of business we don’t even hold the permissions to operate in.

“By any fair measure, firms shouldn’t be being billed for things that have gone wrong in areas of the market in which they don’t participate.

“The size of the levies being raised, the rate of increase in those bills and the way in which those are being applied failed a fairness test and there is widespread concern about the structure of that funding and there is determination from many market participants that something has to change.

“So we are going to fight this every inch of the way because it’s something that we believe in very strongly.”

Mortgages for Business managing director David Whittaker agrees: “At the moment it would appear that my sector are propping up the wealth advice sector.

“This needs to be appropriately considered by the FCA but at the moment we are just being pushed to one side.”

And Whittaker says reform would not only benefit mortgage brokers.


“When the mortgage sector gets something wrong, and it will do, change would mean that the wealth advisers haven’t then got to cop something that goes wrong in another space,” he says.

“In an increasingly fragmented market it’s important that each segment is appropriately reviewed and costed.”

The FCA is committed to revisiting the funding of the scheme as part of a regular tri-annual review next year.

“As part of the review, we will consider whether the current funding class structure remains appropriate,” a spokeswoman for the regulator says.

“We will be requesting views from stakeholders on this issue and on the wider review when we publish a discussion paper later this year.”

An FSCS spokeswoman adds: “We do realise that parts of the industry do feel that our funding is not completely fair on some sectors, but unfortunately that’s not really down to us.”

However, sources close to the FCA warn any amendment to the current system could simply see term assurance and critical illness reclassified as insurance products.

Such a move could see brokers then required to contribute to the funding of settlements for missold payment protection insurance.

Similarly, the creation of more specific funding classes, potentially isolating brokers, would either require substantially larger fees or fail to generate enough cash to provide compensation in the case of a collapse.

Mortgage Advice Bureau founder Peter Brodnicki says: “It doesn’t seem particularly fair to group protection claims in with wealth management.

“But if you put all those wealth claims under a levy applied only to those firms, that might be too much for them to absorb.”

However, Whittaker says the risk of categorised firms failing to raise enough cash could be mitigated by looking to insurance markets.

“With a clever reinsurance market you could take a certain amount as a premium to reinsure against a single market shock,” Whittaker says.

AMI, meanwhile, is proposing a product levy taken at the point of sale as another alternative.

Sinclair explains: “At the point when investment is made or a product is sold there should be a percentage of that investment or premium ear-marked for the FSCS and that is made clear to the consumer.

“Then the consumer is aware that they are buying a product that has compensation and that they have a degree of protection if something goes wrong.

“And it would then be a consumer charge on the product, rather than something that has to be paid by the firms.”

Sinclair acknowledges that such a move would be difficult to engineer, not least because it would likely require new legislation.

However, he says the trade body has been cheered by the tone from both the FCA and the FSCS.

“There is an acknowledgement that perhaps some of the boundaries for the structures are not as appropriate as they could be, even if that doesn’t necessarily translate to a direct commitment for change.”