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Nic Cicutti: The struggle to find FSCS funding solution

When your head has been smashed hard against a brick wall for ages, the fact that the force of collision has lessened slightly can sometimes feel like an enormous relief.

Yet somehow, I very much doubt that the vast majority of IFAs will feel that way about the announcement the Financial Services Compensation Scheme interim levy will be a “mere” £60m, compared with the £326m that was being demanded last year, albeit the majority of the bill in 2011 was paid by the investment fund management sub-class.

It may be one thing to say, as the FSCS does, that a large part of the interim levy, totalling some £26m, still relates to claims from firms in default that were already well known – Keydata, Wills & Co and Arch Cru – but the fact that it seems to have taken so long to settle them, leaving IFAs with a continuing set of bills, year after year, is highly debilitating.

FSCS chief executive Mark Neale was quoted as saying: “We know this will be unwelcome news and sympathise with firms about the unpredictability of compensation costs. We do everything we can to provide as much certainty as possible.”

The problem is, they have not provided much certainty at all. Only last December, the FSCS told advisers the levy would most likely be in the region of £40m. Now they are being told it will be 50 per cent higher. That doesn’t strike me as very “predictable”.

Just about the only group who will be happy in the wake of this announcement will be fund managers, who will not be affected this year as tota

This really is a shocking state of affairs and it beggars belief that no one seems to have a solution to the problem. Only the other day, Treasury financial secretary Mark Hoban effectively told a meeting of the Commons public bill committee that some of the best financial minds in the UK – by that, I mean regulatory “minds”, so maybe not the best after all – had been unable to devise a solution.

Hoban told MPs: “I have thought about it and failed, the FSA is struggling with it, as are industry groups because they recognise the burden has to be shared. The challenge has been that it is difficult to predict the calls on the scheme because they depend on how many firms go bust and what liabilities a firm has.”

That may be the case, but what Hoban does not appear to have commented on is the fact that many of the problems faced by IFAs relate to firms whose activities went far beyond their original classification by the FSA and were never properly regulated even after they were placed in the investment intermediation sub-class. Ultimately, IFAs are paying for the fact that the regulator did not do its job properly.

What worries me is that now some of the pain has receded slightly in terms of how much IFAs are likely to pay – and completely in the case of fund managers – the impetus for reform of the present system may be lost.

After all, last year, fund managers were strong-armed into forking out £233m out of the £326m interim levy, with companies like Brewin Dolphin levied for £6.1m, Rathbone Brothers having to find £3.6m and £2.6m being Charles Stanley’s share of the bill. No wonder they were livid.

Yet this year, the absence of any big bill for that sub-class means advisers have lost potential allies in the drive to see the rules changed. One additional concern is that, assuming more systemic failures do not reveal themselves in the coming year or two, the size of the FSCS levy will recede to more “normal” levels, lulling advisers into a false sense of security.

That would be a mistake. As I have argued before, while impossible to predict in their scale or timing, systemic collapses are a by-product of poor regulation and an inadequate compensation funding mechanism. There is still a need for a long-term solution that ensures advisers are not left with massive bills when they least expect it.

Whatever form that solution takes, it should not be a product levy. The minute we go down that route, one thing is guaranteed – both product providers and advisers will feel even more encouraged to create and sell the most appalling financial products, safe in the knowledge that if anything goes wrong, it will be punters who pay the full price.

By contrast, making IFAs take some responsibility for their peers’ behaviour may be crude but it could serve as an effective means of ensuring collective compliance with conduct of business rules, as long as all advisers are prepared to shun the kind of products that are most likely to lead to the failures we saw two or three years ago with Keydata and others.

This actually means IFAs demanding tougher regulation of their fellow members, not less. It also raises an additional question – which is that of exactly how those cross-subsidies should be calculated. For example, if one side-effect of the RDR after 2012 is that the fully compliant IFAs were to face a much smaller FSCS potential levy than restricted advisers, what is not to like?

Nic Cicutti can be contacted at nic@inspiredmoney.co.uk

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Comments

There are 15 comments at the moment, we would love to hear your opinion too.

  1. “As I have argued before, while impossible to predict in their scale or timing, systemic collapses are a by-product of poor regulation …….

    This actually means IFAs demanding tougher regulation of their fellow members, not less.”
    Contradictory nonsense. A product levy is the only way ahead.

  2. The current system might work if IFA’s only paid for the failings of other IFA’s and not the failings of product providers, stockbrokers and US fund managers.

    The concept of the FSCS is not great but could work if the levy were applied fairly.

    IFA’s should only have to pay out for mis-sales of other IFA’s where those businesses fail – this would be a relatively small cost and quite affordable. However currently IFA’s appear to be responsible when almost anything that is ‘authorised and regulated by the FSA’ fails.

    The FSA stamp should be a mark that the FSA has conducted higher due diligence than any IFA client would be prepared to pay for.

    If IFA’s only pay for other IFA’s the FSCS would work.

  3. I am glad I wont be part of the “solution” from 2013 as throwing in the towel. Enough is enough

  4. Peers? UK IFAs, US MF Global? I don’t think so. How many IFAs engage in rehypothecation like MF Global? Why is it even allowed?

  5. The assumption that the RDR and ‘tougher regulation’ will have a positive impact upon the burden of the FSCS is naive in the extreme. It has become your prison.

    There might be a simple solution but it certainly isn’t a product levy.

    Is it an an advice levy? A form of insurance? A replacement for the PI rip off?

  6. More obvious drivel Nic. Any chance of some informed new thinking or comment soon? I think not!

  7. “product providers and advisers will feel even more encouraged to create and sell the most appalling products”.
    Thats a highly unimaginative view of what a solution might look like. You would build in disincentives for bad “behaviour” that would apply before compensation from the scheme is triggered, so the behavioural incentive AND the ultimate protective backstop would both be there.
    The travel industry works with a prefunded scheme and people generally have confidence in it and accept it, even though it ultimately comes from product pricing and hence the punter pays; no doubt the same applies to countless other industries. What cannot make sense is to persist with a scheme that would ultimately fail in the event of a large enough problem anyway, dragging thousands of “good “businesses down as it goes, and which lets those who are going to misbehave play without paying upfront.

  8. re Paul Hardings comments being bang on regarding Large enough businesses failing, there only needs to be a few meduim sized companied going bust or fraudlent activity and the current levies will look very small in comparison and the FSCS levies will be picked up by the remaning IFA’s. If 20% of IFA’s leave in 2013 and another 20% leave in 2014 as forcast, that leaves a 40% increase in fees for the remaning IFA’s assuming the FSCS funding in remains the same!
    This is the biggest Elephant in the room that could seriously hit qualified IFA’s pockets vary hard indeed.

  9. “..making IFAs take some responsibility for their peers’ behaviour may be crude but it could serve as an effective means of ensuring collective compliance with conduct of business rules..”

    Is this a joke? So I pay for another IFAs negligence and by some mystic method I impose greater discipline or more care on his/her part by…how exactly? Should I get the names and addresses of those respoonisible and write them rude letters? Should I send them notes along the lines “..I know where you live..” ?

    This sounds like a really desperate attempt by an exhausted mind to justify fining everyone in sight whether they are responsible or not. And it sounds like that because that’s exactly what it is.

  10. And ‘as I have argued before’, it is the investor who is seeking protection and he should pay for it very simply through a product levy. There would be no problem with this approach if the regulator were doing a proper job; it is not.
    Now that Sants has gone perhaps we can get down to some serious discussion that is not a one way dictum.

  11. Why are clever people struggling with how to resolve this issue?

    Are they really that thick that they cannot see the way forward is a product levy, a small charge on every life, pension and investment plan will more than cover what is going to be needed in the future.

    People who insure their cars carry a cost within their premiums for all the bad drivers who cause accidents or who are uninsured and don’t have cover.

    So what is so difficult to understand, it is the consumer of financial products who pays for the levy through the earnings of advisers who have to earn more profit to pay their levy, so why not put the cost on to the products so that all consumers pay it, just like all car drivers!

    Complex problems sometimes actually have very simple solutions.

  12. I understand that IFA,s who never sold these products are annoyed but I am not an IFA but a Mortgage Broker. However last year I received a levy of nearly £1000 towards the FSCS presumably for products I cannot sell. When I took issue with the FSA they informed me that as I conduct retail business the levy must still be imposed. Crazy !

  13. If the FSA were to rubber samp every product (which they wouldnt due to the huge liability that would cause) then the cost of regulation would go through the roof! Seriously, the levy would fall but the cost of the regulator would double if not triple. Its an unimaginable task to check and research every single investable product on the market and one which would be simply impossible to guarantee.

  14. Adam,
    If we want clients to know that what they are investing in is “ok”, then someone has to do something at some point. Overall the cost of doing it (to a certain level anwyay in terms perhaps of some basics like product structure, corporate and financial due diligence) is far better done once at the centre by an expert team than hundreds of times by less capable people who are also doing a million other things. It would actually make paying your regulatory fee feel worthwhile, knowing it was saving some basic work!!
    Then, IFAs regulatory costs COULD fall dramatically if:
    all “products” were approved or not, in terms of certain basics
    properly qualified advisers were then left to get on and do their basic job how they see fit (like other qualified professionals are), probably using only these “approved products”
    all “non advice” aspects of running a business were removed from the need for scrutiny by the regulatory regime with jstu orinary business law applying as for every other firm in every other industry

  15. I’m with Nic on this. The FSA is a headmaster, whilst setting the tone, ultimately the playground is monitored by the collective. How this might work is not straight-forward. however a reclassification of firms is surely the first obvious hurdle and part of this should include the discretionary powers. How compensation is paid for, I wouldn’t mind if it was just and ideally fair (similar type of adviser messed up etc). Some of the pain needs to be taken by the investor, some by the inept Auditor/Accountancy firm (how do they get away with such poor work?) some must be taken by the Regulator, some by Government (after all they appoint the FSA). Product providers and their local jurisdiction also need to take appropriate responsibility. A product levy might work, whilst a complete pain, it does at least help and it’s based on use, I don’t think this would open the floodgates though Nic. To my mind I tend to agree that culprits should not be able to hide behind a Ltd company where losses have no relationship to the owners. Where “honest” mistakes are made I have much sympathy, where someone is reckless, careless or just a thief I have none… Throw the book at them if guilty….everyone needs to step up to the plate to take fair responsibility otherwise this is a mess that is only going to worsen as others have already stated well, clearly we cannot go on bailing out crooks that aren’t even IFAs.

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