I got a tweet from a financial adviser last month. “Why has my levy for the Financial Services Compensation Scheme gone up 529 per cent?” he asked. Others joined in: “up £2,000,” said one. “Pretty much tripled,” said another. And so on.
Readers of Money Marketing will know this year’s significantly higher levy is causing much anxiety. The Financial Services Compensation Scheme, of course, says it has to pay a growing number of ever-larger claims for firms that defraud customers or missell them stuff.
But why should the good, honest financial advisers, who are clear, fair and not misleading with customers, foot the bill for all the grifters?
I have no answer to that. Replying, “well, someone has to pay” is hardly going to make anyone feel better. A fair response to that would be: “I understand that but why punish the good guys?”
I might then be tempted to say: “it is tough but you do work in an industry with a lot of bad guys.” And back would come the response: “So, what should I do? Open a chip shop?” At that point, I would stop arguing because what is going on seems to be (and I hate to use the word) unfair. Even to me, who lives by my mother’s maxim that no one said the world has to be fair.
Of course, the levy system tries to make it fairer. Pension firms pay for the transgressions of pension firms, insurers pay for claims of missold insurance and so on, right? Well, roughly. It is all very complex and even the FCA has got it wrong, as exposed by Money Marketing recently. At the end of the day, juggling who pays how much does not make it any fairer that the good guys pay for the offences of the bad.
And they pay a lot. In 2014/15 the headline figure was £1,420,000,000. Yep. To regulate firms, help those who have been mistreated by regulated firms and compensate the worst cases cost more than £1.4bn. And that is without the Money Advice Service and Pension Wise. The FCA costs more than the National Crime Agency – and they deal with criminals. It costs less to run the Serious Fraud Office than the FSCS.
The biggest growth in costs in 2014/15 was the FSCS. Its administration bill for the period of £71.5m may seem modest enough (especially if you ignore the £20m it spent on the still-not-quite-working Connect online claims system) but that is dwarfed by the compensation paid out: £326.6m. This is a rise of 34 per cent compared to 2013/14.
It may well be higher in the current year and, as a result, the FSCS levy for the life and pensions sector trebled from £33m in 2014/15 to £100m for 2015/16. The FSCS says that is largely due to a rise in claims for missold Sipps. The extra fees are “to fund the compensation costs for these claims”.
So the FSCS confirms the good guys pay for the bad ones. But why are there so many bad guys – and growing?
The biggest chunk of your levy money – about a third – is spent by the FCA. In 2014/15 total administrative expenses were £533.5m: a rise of 13.6 per cent on the year before. In the 14 years since the FSA really got going in 1999 to 2013, the year before it split into the FCA and the Prudential Regulation Authority, the compound increase in its growth was 11.7 per cent a year. Growth many investors would love to achieve.
The one year when costs fell was 2013 when the PRA was hived off to the Bank of England. However, that one-off reduction of around £200m was soon made up. This year, the FCA will almost be back to the FSA’s 2012/13 record of £583m. And of course the PRA, which cost £235m last year, still has to be paid for on top of that.
This year’s FCA costs will be boosted by paying for two chief executives. Outgoing chief Martin Wheatley’s surprise announcement on 17 July that he is stepping down will be expensive. After that he will advise the board for four and a half months on full pay. Then he will be sent on six months’ gardening leave, also on full pay. That fulfils his 12-month notice period. Even if he receives no bonus he will still get his 2014/15 basic remuneration of £618,000 at least. Nice non-work if you can get it.
So why does that £533.5m, mainly spent on authorising and regulating firms and individuals, not stop the wide boys before they target and screw their victims?
In the latest FCA annual report, Wheatley said: “In December, we announced that we would restructure key parts of the organisation, enabling us to have a sharper focus on the firms we regulate and delivering the right outcome for consumers.”
Not before time. If it works, it may reduce the costs of compensation, which would mean the good, honest advisers paying less to cover customer losses caused by the rogues the FCA misses.
But that is not enough. Under Wheatley the fines levied by the FCA have rocketed by a total of £2.25bn in the last three years. Since 2013, most of that money has been snaffled by the Chancellor: a total of £1.7bn in two years, in fact. The Chancellor likes to spend some of that on military charities and the NHS but surely there is enough left to pay the £300m to £400m annual compensation bill and still have change to reduce the deficit? Then at least the bad guys would be paying for the really bad guys. Which would be a lot fairer on the good guys.
Paul Lewis is a freelance journalist and presenter of BBC Radio 4’s Money Box programme