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 firstname.lastname@example.org