It may not have made the same headlines as last week’s Treasury select committee hearing on the retail distribution review but last Wednesday, Aifa was in Parliament to fight for urgent reform of the Financial Services Compensation Scheme.
In a formal hearing with the All Party Parliamentary Group on Insurance and Financial Services, Aifa made clear the feelings of members about the failures of the current system.
We support the principle of the compensation scheme and believe a fund of last resort is crucial to consumers’ trust and confidence in the financial services. But there are a number of fundamental flaws that leave the current scheme unfit for purpose.
The recent interim levy on the investment class resulted in IFAs paying for the failure of a product provider. This is simply unjust.
Despite embarking on a pre-consultative process early last year, the FSCS is not under public review, which is urgently required.
But what do we want to see in its place? There have been calls for an element of pre-funding to be introduced but, given the level of funding required, the transitional period could be crippling for companies. They would be meeting ongoing post-funded costs and paying for the pre-funding of the new scheme concurrently. Aifa estimates pre-funding alone could result in the equivalent levy of £100m per annum for the investment intermediation class for the next five years.
There are two other areas that require further consideration. First, the work by the FSA in regard to “leaving resources behind”. Aifa broadly supported the use of a firm’s existing regulatory capital, which could in theory be held on account when a firm leaves regulation and then returns to the firm, or shareholders, a set period (perhaps five or 10 years) after de-authorisation, subject to payment of any claims that had arisen.
Second, Aifa would welcome further debate on a product levy. At a time when consumer transparency of both cost of products and advice is at the heart of many of our regulatory interventions, we believe a specific cost built into a product holds some degree of merit.
We also made a strong argument to MPs for the inclusion of a 15-year long stop in the revisions to the Financial Services and Markets Act. This is a long overdue reform and we welcome the comments from Hector Sants that the FSA is open to reviewing this.
At the very least we need amendments to the definitions of investment intermediation to ensure a fairer scheme for the IFA profession. But as we said, on behalf of members, to this group of influential MPs, a wide-ranging industry debate and formal review of the compensation scheme is now necessary and urgently required.
Andrew Strange is director of policy at Aifa