Providers will have to contribute 25 per cent of advisers’ Financial Services Compensation Scheme bills, the FCA has ruled today.
Despite fierce opposition from some providers, and some advisers arguing that providers should pay up to 50 or 75 per cent in response to the FCA’s consultation, the regulator has decided to go ahead with proposals for providers to field a quarter of advisers’ funding requirement.
The provider contributions will also include discretionary fund managers and depositaries.
The FCA writes: “We think that requiring providers to play more of a role in contributing to the FSCS reflects the fact that these firms benefit from overall confidence in the UK market and the structures that exist for the distribution of products to consumers. Requiring providers to contribute should further incentivise them to design products that are well understood by intermediaries and that benefit end consumers, and to understand and exercise control over their distribution chains.”
Providers such as Aegon has been in favour of the move, but others noted that they could not be held responsible for advisers’ behaviour, and the costs of increased scrutiny of advisers might be passed on to consumers, according to the consultation responses published today.
Some vertically integrated firms said they should only have to pay costs if their own advice business failed, but the FCA dismissed this on the basis that if it “removed firms with direct sales models, providers who use external intermediaries would subsidise levies paid by those who do not.”
The FCA added that alternative proposals for FSCS funding put forward by providers would either increase the volatility or complexity of the scheme.
The regulator writes: “Given the complexity of the financial services market we are wary of introducing an overly complex calculation. We thought that 25 per cent was a reasonable reflection of our overall policy aims, accepting the divergent industry views on the topic, and recognising that this is a significant change.”
The decision comes after a multi-year review of FSCS funding by the FCA, with several other new rules intend to reduce the volatility of compensation bills and ensure different sectors contribute fairly.
Previously, adviser business was split into two classes – pensions and investment intermediation – with FSCS bills calculated based on the respective turnover from each pool.
To streamline this, the FCA has decided to merge the two classes.
Advisers selling pure protection will also be moved out of those pools to sit in the general insurance distribution funding pot.
However, at the same time, the limit on claims for investment intermediation will increase from £50,000 to £85,000. This helps address the discrepancy in limits between annuities, for example, where 100 per cent of the policy is covered because it is insurance backed, and drawdown style products where bad advice has been received.
The FCA has proposed a further new rule, that professional indemnity policies do not bar claims in the case of insolvent firms, shifting more compensation to insurers rather than the FSCS.
The FCA writes: “We are aware that historically, some PII providers have sought to limit their liability by preventing the FSCS from making a claim on the policy…Where a firm has, for example, provided negligent financial advice for a consumer to invest in a fund, we do not believe a claim on that firm’s PII should be excluded by virtue of the insured or the fund becoming insolvent, provided the claim has been notified correctly and the product is not otherwise excluded.”