How good are IFAs at lobbying on their own behalf? Probably not as good as fund managers, or so it would seem.
About two months ago, I wrote a column to the effect that the impetus for reform of the FSCS seemed to have been lost in the wake of a massively reduced “interim” levy from the scheme itself.
In March, the FSCS announced it would “merely” (my quotation marks) be asking for £60m, compared with the £326m that had been demanded last year.
But the key aspect of the 2011 compensation bill was that the vast majority of that levy was paid not by IFAs but by the investment fund management sub-class.
About £233m was handed over by asset managers, including companies such as Rathbone Brothers, which had to find £3.6m, Brewin Dolphin, which was levied for £6.1m, and Charles Stanley, whose business took a £2.6m hit. The squeals of anger from that sector of the industry were loud.
Back then, I wondered whether the long-awaited review of the FSCS, which has been meandering on a road to nowhere for almost three years, would be delayed further. Fund managers, having paid so heavily in 2011, might feel they were not liable for massive bills in the current year, reducing their ardour for reform.
Were they assisted in believing they might escape lightly this year? One cynic who wrote to me pointed out that “what people are missing is the way in which the FSCS has pushed CF Arch cru into the 2012-13 funding year to avoid breaching the £100m cap this year.
“It got close this year. For that reason – and that reason alone – the FSCS has stalled on paying out on CF Arch cru. It has had the claims since 2011 (early in the case of Alpha 2 Omega clients).
“If it had dealt with matters correctly, the interim levy would have had the full levy for CF Arch cru. If you read the detail of the FSCS press release, it does not specifically say how much for CF Arch cru.”
My fellow cynic has a point. If you look at the FSCS statement on the interim levy, it says: “Investment fund managers are not facing an interim levy in 2011-12.
“The costs of claims driving the interim levy will not trip the £100m annual limit on the compensation costs for intermediaries.
The total compensation costs of the annual levy and the interim levy are £82m, so they do not trigger the cross-subsidy.” How convenient.
Even so, there is a massive problem looming for fund managers, which no amount of delaying tactics and prolonged salami-slicing of compensation payments will overcome – MF Global.
The effective collapse of MF Global in October last year, after huge and highly risky bets on European government bonds went bad, is a potential nightmare for UK fund managers and the FSCS.
The Financial Times reported at the start of May that £650m of non-segregated funds have been collected and a further £470m of segregated assets traced to a number of financial institutions but there is a question mark over what proportion of that money can be repaid to clients. Reports from the US suggest up to £1bn of clients’ money has gone missing and much of that has not been recovered.
Even a conservative compensation scenario suggests the FSCS may find itself paying out on claims totalling what could be hundreds of millions of pounds
If so, financial advisers in the investment intermediaries sub-class will also be hit, although this sub-class is already nearly up to its limit, as will those in the life and pensions sub-class. But fund managers, who hoped they had got away lightly in the current FSCS funding year, will now also be in line to be blown over by a compensation tsunami heading their way in 2013.
It is vital, in the semi- calm before the next wave of FSCS levies falls on all sides of the industry, for IFAs to renew their lobbying of MPs over the way the compensation scheme should be restructured.
The issue of whether to join forces with fund managers in the lobbying approach is a tactical one. Can a compromise be reached that ensures both sides are happy neither pays a disproportionate amount towards future levies? I am not sure that is entirely possible.
If so, the IFA Centre’s call for MPs to support an amendment to the Financial Services Bill, giving the new Financial Conduct Authority more flexibility as to how levies are imposed on regulated firms under the FSCS is a good start.
The IFA Centre, Gill Cardy’s new trade body, is calling for the bill amending the 2000 act to ensure the FCA has “regard to the extent to which some authorised persons may have derived business, or otherwise derived benefit, from a firm that is declared in default, the extent to which various authorised persons have contributed, by act of commission or omission, to the losses incurred and the desirability of avoiding levies that are significantly anti-competitive in their effect.”
Regardless of whether you are members of the IFA Centre, it may now be time to join forces in its lobbying efforts.
Nic Cicutti can be contacted at email@example.com