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Paul Lewis: Unfair FSCS levy punishes honest advisers

Lewis-Paul

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

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Comments

There are 27 comments at the moment, we would love to hear your opinion too.

  1. Well reasoned!

  2. Dominic Thomas 30th July 2015 at 2:32 pm

    Well said Paul Lewis.

  3. Excellent article by Paul and well said.
    The big question is, why do honest advisers have to pay for the poor supervision by the previous and current regulators, whilst the dishonest advisers seem to walk away unscathed and a lot richer?

  4. Anthony Peters 30th July 2015 at 2:48 pm

    Well presented but why don’t the powers that be listen and design a fairer way to charge for fees based on actual claims history for example?

  5. Stuart Gregory 30th July 2015 at 2:53 pm

    Great article Paul, funny isn’t it though (and inherently unfair) – the ‘heirarchy’ at the top of the chain fail, and get Knighthoods whilst the honest ones left behind pick up the pieces figuratively and financially…

  6. Richard Shanks 30th July 2015 at 3:00 pm

    A good point well made Paul.

  7. Paul Richardson 30th July 2015 at 3:05 pm

    Correct, as a company who writes a lot of protection I still cannot understand why pension and protection are put together in one block (which incidentally means we are crippled from writing a lot of protection on the levy) and investment in another block. Why not pension and investment together. Very unfair we have never written a SIPP.

  8. What we are seeing is disguised taxation, the Chancellor takes a bite out of fines that have nothing to do with Government, it is supposed to be an independent Regulator, then the bill for any compensation shortfall passes to adviser firms, who never benefit from any positive cashflows into the FCA coffers.

    It is clear from a recent conversation with a Minister that once the Chancellor has drawn the line in his budget book, nothing will get in his way, so forget about lobbying and consultation, it is a done deal.

  9. Very sound! Couple this to the hike in PI, which I to date have never made a claim in 25 years , makes regulatory costs a significant expense!!

  10. Shame there is no-one able to challenge this with the FCA and bad guys are mostly our high street banks!! and Structured Product companies with misleading layers built in products. Perhaps Ross could help

  11. Gavin Fielding 30th July 2015 at 3:45 pm

    Paul a good article another figure to consider is the loan arrangement between the Treasury and FSCS, the FSCS levy does not include this gap amount. The FSCS does not hold capital so is always in arrears on compensation. In these debates the ‘good guys’ are often referenced, they won’t ever get a discount or good behaviour rebate because the scheme is in debt (to the Treasury) to start with.

  12. Trevor Goodbun 30th July 2015 at 3:58 pm

    I must join in with the approvals above, its very frustrating and will surely reach a point where it becomes untenable.

    On the basis of a quick look at a number of DB pensions that people wanted to access recently, I have turned people away, for various reasons, for example they hadn’t appreciated the fact their leaving benefits had been revalued.

    However after the last interim levy I must admit the thought went through my head ” flip it (or words close to that), so why shouldn’t I just do it”. At least they will receive good advice in the first place , and if they want to ignore it that’s up to them, I’ll end up paying for the crap advice anyway

    Needless to say I didn’t. Sleep is a much undervalued commodity!

  13. Well said, however, don’t forget that this isn’t a one off situation. Our FSCS fees in 2013/4 were £2098.08. This increased by 128% to £4788.35 in 2014/5. This then increased by 113% to £10177.94 in 2015/6. These figures do not take in to account any FSCS interim levy.

    That means for a small firm of 2 full time and one part time adviser, the fees have increase from £2098.08 to £10177.94 in just two years. An increase of £8079.86 or 385%.

    Lets not forget that we don’t have a choice. There is no competition. The FSCS has no interest in either not paying claims or trying to reduce the amount paid out, or the costs of running the business.

  14. “honest advisers paying less to cover customer losses caused by the rogues the FCA misses”………. actually it’s the honest advisers clients who pay our bills, who are ultimately picking up the tab for it….

  15. You correctly point out the moral hazard in the entire method used to collect fees and levies. The regulator does not like providing a regulatory dividend for good behaviour.

    For an alternative approach that could be used to encourage good behaviour and discourage unwelcome conduct see
    https://secure.cfauk.org/assets/3372/CFA_UK_fees_and_levies_proposal_for_2015SENT.pdf

  16. As I have said before – a good case for using the fines to fund part of the regulatory cost. To avoid benefiting culprits it shouldn’t be beyond the wit of all these number crunchers from the big 4 to devise a system whereby malefactors don’t benefit.

  17. Mike Fenwick predicted all this back in 1985, nobody listened.

  18. Spot on and a comprehensive well-worded article, thank you! Let the fines from the industry’s wrongdoers pay for the costs of FSCS compensation to the clients of the industry’s wrongdoers and the government can, if they must, keep the significant remainder.

  19. Julian Stevens 30th July 2015 at 5:39 pm

    Yet Mark Neale would have us believe that “the funding of the FSCS is working fairly well”. The man’s full of it.

  20. Paul Lewis ?
    They do say, the catalyst to spark any revolution, may come from the most unlikely of directions !

    After the planet Zorg article last week……… well the least said about the better, we have returned with a clear, fair, and detailed account of how unacceptable our regulatory system is !

  21. Thank you Paul but is anyone at the regulator or in government listening? Our sector is still seen as a cash cow, and unfortunately all these rising costs are slowly strangling it. The problem could be solved in one swoop if the government stopped stealing all the fines and used them for what they should be used for = i.e. the compensation payments.

  22. A welcome article Paul as we all know the current system is lunacy. However what worries me is that with all the demand for advice created with the pension freedoms & the advice gap that has been created by (over) regulation, anybody who wants to make a ‘fast buck’ could abuse the system very easily. Just Fill their coffers and bugger off – leaving the FSCS to pick up the tab and leave us, the honest one’s picking up the bill. In that sense the FCA are failing in their role. This is a pattern that has been repeated before and our regulatory and compensation system actually creates the problem albeit unintentionally.

    There has to be a better system and we need it fast as the demand for advice is huge but the numbers providing the advice are falling fast. Whilst the lunatics are running this madhouse I cannot see it changing as there are too many vested interests in keeping the status quo. We need new thinking.

  23. Colin Caulfield 31st July 2015 at 10:18 am

    How can you argue with this article ?
    Come on powers that be, do something about it and make it more logical and fairer.

  24. George Williamson 31st July 2015 at 1:53 pm

    Spot on.

  25. One question do the banks pay levy on orphaned investment funds? There are billions in these funds and no-one is advising clients on them. One high street former building society has £5bn in a poor performing UK Equity fund. Wonder what they are making from the “management” on that???

  26. It is not simply a question of balancing the funding but also of checking to see whether ‘compensation’ has been paid out using sense as opposed to regulatory/political logic

  27. 2 years more for me. I’ve already set up another business (investment consultancy, no advice).
    After the 2016-18 recession, my clients will pay me 90% of what they do now, but I won’t be paying PI, compliance support, or the FCA/FSCS. No more Gabriel. No more CPD. No more advice, just consulting.

    Sadly, most advisers don’t ‘do’ investment advice any more, no expertise in that area.
    Remember the misery of 2008-09? Only 10-15 years of that to look forward to: the 1930s/1970s with a ‘day of reckoning’ to singe your eyebrows off. Can’t wait. Good luck.

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