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Product levy would penalise consumers

Of all the necessary reforms in financial services, the issue of how the Financial Services Compensation Scheme is funded is one of the most urgent. In the past 12 months, IFAs have seen a huge hike in FSCS levy payments. Advisers in the investment intermediation sub-class have been particularly hard-hit, with an interim levy of £93m this year.

The FSCS has blamed the failures of Keydata, Wills & Co and other major firms for the sharp rise in levy costs. Next year’s costs will fall, it promises, if only because it does not foresee another Keydata occurring any time soon. That is as maybe. What is certain, however, is the system reeks of unfairness. Moreover, what is also becoming apparent is the way the levy is raised is flawed on many different levels.

For example, one side-effect of the way the system works is that advisers and wealth managers who never touched Keydata products have faced massive hits, while other businesses heavily involved in misselling have got off scot-free.

The classic case is Norwich & Peter-borough Building Society, which sold Keydata life settlement bonds to 3,100 investors across its 46 branches. Yet it has been allowed to define its “eligible income”, the key criteria through which it is assessed for the FSCS levy, by reference to its tiny IFA business alone. By contrast, wealth manager Brewin Dolphin has taken a £6m hit, with Charles Stanley stung for £2.6m and Rathbone Brothers paying out £3.6m.

No wonder there are calls for reform. The issue, however, is what kind of reform. People are now dusting off ideas proposed many moons ago as to how to fund the FSCS. Among them is SimplyBiz chairman Ken Davy, who is revisiting a proposal for a product levy first advanced by the old LIA more than 17 years ago and backed by him ever since. Ken believes a product levy would only cost “a fraction of a penny for each £1 of investment”.

Aifa, with its talent for tailing behind whoever shouts the loudest, appears to agree. The trade body aims to publish a discussion paper on FSCS reform later this month. Meanwhile, it supports an idea previously mooted by the FSA whereby firms’ existing regulatory capital is held on account when a firm exits the market and returned to it after a set period if no claims had arisen during that time.

At the same time, Aifa policy director Andrew Strange told the All Party Parliamentary Group on Insurance and Financial Services the other week that his trade body would “welcome further debate” on a product levy. “At a time when consumer transparency of both cost of product and advice is at the heart of many of our regulatory interventions, we believe that a specific cost built into a product holds some degree of merit and would foster an approach of consumer responsibility,” he said.

Maybe Ken thinks his old idea’s time has finally come. I sincerely hope not. A product levy would penalise consumers instead of the industry for cases of misselling, although I accept there may be some knock-on effect in terms of overall product costs.

I should add two caveats. When this issue was discussed a few years back, I said the current system was a crude but potentially useful mechanism for ensuring better long-term compliance with FSA rules. It would also force IFAs to take direct financial responsibility for their peers’ behaviour while serving as a semi-Darwinian method of ensuring only the most financially stable intermediary firms remain open for business.

What I had not taken into account is that no matter how much IFAs improve in dealing with the public, there will always be a minority able to damage their peers. Neither had I accounted for the FSA’s appalling inability to classify individual firms into appropriate categories, as happened with Keydata. I also did not account for the FSA failure to regulate firms appropriately, even those doing terrible damage to their clients.

Ironically, the campaign against the FSCS by Martin Bamford is a classic example of IFAs doing something right by consumers. It calls on the FSA to do its job properly, presenting itself as being on the side of the public. By contrast, there is no doubt that a product levy, whether costing a little or a lot – for someone with a portfolio of, say, £250,000, Ken’s “fractions” could amount to hundreds of pounds a year – is unfair to consumers.

It would turn what is currently a vague promise of probity on the part of the financial services industry towards its clients into a basic form of insurance. Instead of promising that if anything goes wrong the industry will make sure no one loses out unduly, clients would be told that fraud, misselling and failure are inevitable and they might as well take out cover against it.

I cannot think of a message to consumers more depressing than that.

Nic Cicutti can be contacted at


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There are 18 comments at the moment, we would love to hear your opinion too.

  1. It’s hardly comforting to read that the FSA’s position is that we can all now relax because it “doesn’t foresee another Keydata occurring any time soon”. Since when did the FSA ever see anything coming?

    The FSA was in possession of information as long ago as 2007 that problems were looming with KeyData, yet it failed to act. So, if the FSA failed to take steps to avert the KeyData crisis when it did have information on which it should have but didn’t act, on what basis are we supposed to have any confidence that another KeyData-type collapse isn’t just around the corner merely because the FSA says it doesn’t think it likely?

    Having admitted that the present system of FSCS is unjust and in need of major reform, Nic goes on to say that he doesn’t favour the idea of a product levy because it’d mean that consumers rather than providers and advisers would have to meet the costs of their own protection in the face of the regulator failing to do its job. Many would ask: Why shouldn’t they? And what does Nic propose as an alternative? From reading this article, the answer appears to be nothing.

    The message that a product levy would send to consumers, I suggest, is that the FSA, despite charging the industry a fortune for its very existence, cannot be relied upon to do its job.

  2. Once again Mr Cicutti engages his pen before his brain – lay off AIFA Nic, they carry out a damn fine job in sometimes very difficult circumstances. It is easy to swipe from the sidelines, but if your approach to articles was carried into negotiations with regulators and the like I have no doubt you would very soon be excluded from the room.

  3. The fact that the FSCS exists suggests failures are inevitable, having a product levy is just a sensible and fairer solution than we have at present.

  4. It would not penalise them, it would protect them.
    Nothing in this life is free.Somebody has to pay.

  5. One way or another the customer always pays.

    At present the cost of the protection is charged to the adviser who then passes on the cost to the client/customer. Look how many advisers are now increasing their charges to 1% pa. Mis-Regulation by the FSA will only see costs increase post RDR.

    The real problem is not how the FSCS gets the money but rather that the FSA and its predecessors have failed to regulate corectly.

    They have wasted vast amounts of time and money trying to regulate the advice/sales process when they should have been regulating the products sold.

    Regulate the products that 95% of sales people and Advisers use and the FSCS levy requirements will fall to levels that are not worth adding as a product levy.

  6. Product levy? Yes, definitely. In the olden days, of course, ie pre 2012, this could have been directly deducted from what was referred to as, ah ha, “commission” paid to advisers.
    Not totally sure what we can do post 2012 – maybe advisers will be forced to pay a fee to the provider, and they can invoice the client if they feel the need to do so, and to be transparent? Welcome other threads here.

  7. Unfortunately no matter how well qualified IFAs are there will always be a tiny minority that drag our Profession down. I disagree with Nic, a product levy actually says to clients that we will not hide the fact that there is always a small risk of poor advice, however it gives consumers the confidence to know that if this happens to them then they will be recompensed.

    Otherwise it is back to good IFAs paying for bad IFAs who cause problems and subsequently run for the hills. This cannot continue in the best interests of our profession, otherwise good IFAs will surely leave the profession.

    Nic is in a very powerful position and I would urge him to concentrate on issues where his talents could be better utilised (rather than picking fault with sensible and fair suggestions such as a product levy), namely the Norwich & Peterborough debacle – how on earth can this be right?

    If the FSA are not willing to act (I am sure, if they wanted to, they could use their ‘cover all’ TCF policy to at least shame Norwich & Peterborough into paying up) then surely people like Nic (who earn their living [albeit indirectly] from our clients – as without them he would have nothing to write about!) should take up the challenge – I am sure every right minded IFA would stand alongside him in this quest.

  8. Nic,

    Whatever way we do it, it’s the customer who pays in the end, because it’s what the customer pays that funds it.

    At least a product levy (I hope higher for more risky products) gets it out of the way and doesn’t leave responsible IFAs worrying if they will be able to afford next year’s levy – particularly pertinent if we end up asked to pay for the banking debacle.

  9. Therefore nic, if a fellow journalist writes a libelous piece and is sued, you will be happy to fund part of the compensation.

  10. It should be a product levy on all AMCs not just new investments. Those that get the benefit of the protection should pay.

    It is actually clients of today paying benefits to other older plan clients as it currently stands.

    No-one can see where the claims of the future are going to come from.

  11. David Ravenscroft 21st March 2011 at 9:33 am

    So, ‘Anonymous’, Aifa ‘carry out a damn fine job in sometimes very difficult circumstances’ do they? So do the vast majority of its members. However, while I disagree with your view, I respect your right to say it and would love to see your point expanded on and why you think that is. I happen to think they are carrying out a policy of managerialism and simply overseeing the demise of the sector. I do not believe this is the task for which they are being paid by their membership (although it might be the task required of them by their much more influential industry ‘sponsors’). I would welcome evidence to the contrary.

    Aifa should be big enough and ugly enough to respond to criticism, it has PR and Marketing people in tow to assist – they should be ashamed for asking to be judged on how hard they are trying (bless), rather than results. In fact, I wish it would respond so we could at least hope there is some life left at Austin Friars. I happen to believe the organisation is moribund and whatever rump is left after the RDR will simply be absorbed into another trade body like BIBA, for example.

    Finally, calling for a British journalist on a British publication to ‘lay off’ any valid topic that is pertinent to that publication’s readership suggests to me that there is no answer to the viewpoints or criticisms being put forward; it also feels somewhat totalitarian and I hope Nic treats such a disgraceful ‘threat’ with the contempt it deserves.

  12. Perhaps a combination of product levy and business levy should apply. Why should it fall down on the good to pay for the bad all of the time. Nic, are you saying that all product levies are unfair to the customer? If so then the travel industry should abolish the ABTA levy and leave all those holiday makers stuck in wherever when the next travel company/ airline business goes bust!

  13. Whichever way it is funded surely the consumer ends up paying?

  14. Mr C now says he was wrong last time but is sure he is right this time.
    Whilst past performance is no guarantee….
    It is plain to any person listening to Mr Sants and his co worker at the TSC RDR hearing that the new FSA is to be the same people sitting at the same desks there has to be a product levy not so much to protect the public from the odd rouge provider/adviser but to protect the consumer from the regulator.

  15. ” A product levy would penalise consumers instead of the industry for cases of misselling, although I accept there may be some knock-on effect in terms of overall product costs.”

    The FSCS isn’t there to protect consumers from misselling though, that’s what the FOS is for. The FSCS is a safeguard against a particular company defaulting and not able to meet it’s obligations.

  16. A flawed argument by Mr Cicutti in my view. As others have said who on earth does he think pays in the end anyway, advisors have to pass on these ever increasing costs somehow, which are far from fair due to the flawed system we currently operate.

    When you insure your car how much of the premium do you think goes towards paying for those who drive without insurance and cause accidents and death, quite a lot I believe, so in effect this is no different to a “product levy” which everyone who drives pays. At least with a “product levy” it will be disclosed and consumers can see the actual cost of regulation and failures.

    The compensation bill for the NHS is currently budgeted to be £15 Billion payable over the next 10 years, (and rising) and who do you think pays for that, not a levy on the Doctors, Surgeons and others working in the NHS, so lets get real here no matter where the money comes from to compensate people, it is paid by the majority who use or buy the relevant service.

    The current system is unjust and unaffordable on the present basis, so change is needed.

    So Mr Cicutti if you don’t like it then come up with a better solution and lets hear it, as we have a problem here which needs solving so help us solve it rather than tell us it won’t work.

  17. Poor old AIFA, mocking the afflicted isn’t good sport is it Harry?

    A product levy is out of the question, forget it and move on.

    The FSCS isn’t a consumer insurance fund! It is an Incompetent Adviser Redress Access Team

  18. Julian Stevens 4th April 2011 at 9:13 am

    Can Nic cite a single example of any field of commerce in which some degree of mis-selling and the occasional provider failure are not inevitable? They’re facts of life. So why shouldn’t all consumers pay a small levy towards the cost of their own protection?

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