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Richard Freeman: Reforming irrational FSCS levy will boost advice


Proposed reforms to the Financial Services Compensation Scheme levy could have a lasting impact on the financial planning industry.

The devil is in the detail as they say, but recommendations put forward in the Financial Advice Market Review final report could make a real difference to firms.

The paper suggests the introduction of a risk-based levy, increased use of the FSCS credit facility and reform of funding classes, with the target of smoothing the peaks and troughs in the levies charged to firms.

Funding of the FSCS is already pencilled in for review in 2016 and the recommendations will be fed into that appraisal.

This is good news for advisers, and indicates the regulator and Treasury have listened to industry concerns about the way the levy is currently calculated.

In 2015/16 life and pensions intermediaries faced an annual levy of £100m. While there is some opportunity to plan ahead for the annual levy, an additional interim levy of £20m added further cost for firms.

At Intrinsic, the adviser network that forms part of Old Mutual Wealth, levies and regulatory costs in 2014/15 more than doubled from the previous year.

In any industry, effective business planning is made difficult and sometimes impossible when firms operate under the constant shadow of unpredictable future costs.

This issue is exacerbated by the fact financial planning is largely a cottage industry populated by small local firms. Few adviser firms have a capital base to absorb significant ad-hoc costs without a knock-on impact in investment in other areas.

It is not so much the cost itself, but the fact that money must be held aside as a provision for unexpected bills. The funds could otherwise be invested in recruiting new advisers, expanding into new premises and investment in IT and other infrastructure to generate efficiencies in the advice process.

It also discourages external investment in the industry. Those organisations that might otherwise be persuaded to invest in the wealth management industry are often dissuaded from doing so by the thin margins in advice and the lack of certainty and predictability in future costs.

Building a more rational model for the distribution of FSCS costs will give firms the chance to build long-term business plans, invest for the future growth of their business and access growth capital without fear that unexpected levies will derail their plans.

The compensation scheme is often seen through the lens of the consumer, as a safety net against poor outcomes. That is understandable and the FSCS is a vital pillar of the retail savings market, giving consumers the peace of mind and confidence to invest.

But it is also important for regulators and policymakers to recognise that it represents a tax on industry.

In other industries from farming to oil and manufacturing, UK businesses face similar challenges with unexpected levies, taxes and fluctuating commodity prices. While some are unavoidable, Government and the wider public are generally willing to defend firms from these headwinds where possible.

The FAMR shows that Treasury and the FCA are sympathetic to the challenge that FSCS levies present to the advice industry. They have opened the door to change and it is vital that the industry makes a strong case for reform.

One of the core objectives of the FAMR is to foster a business environment that allows firms to grow. As an industry we must respond to that with a case that shows why the FSCS levy currently represents an inhibitor to growth, with a knock-on impact on the availability of financial advice to consumers.

Demonstrating that the levy impacts on growth in the industry is the key challenge, but if successful there is an opportunity to bring about change that will make the future of the financial planning industry significantly more prosperous.

Richard Freeman is chief distribution officer at Old Mutual Wealth



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There are 6 comments at the moment, we would love to hear your opinion too.

  1. If the FCA do not readily understand the excessive cost burden that the FSCS levy imposes on advice firms and their clients (who of course fund this levy indirectly), without the need to demonstrate our case, then what on Earth is going on? They know, it’s just that someone has to pay and the concept of cost apportionment is clearly one which hasn’t knocked on the doors of the FSCS, who seem to readily invite all and sundry to make a claim under the scheme, whether from this country or even the United States if I correctly recall!

  2. It’s time to review what the FSCS actually covers and there should be no payouts for unregulated investments. Even if the advice is given by a regulated adviser it should be made clear that when investing in an unregulated scheme you are on your own and even the advice is then outside of the scope of the FSCS.

    The idea that the vanilla investment clients of average firms are compensating the speculators and cowboys is wrong.

  3. I have yet to hear of a better process than this: If you buy a product it either has a “covered by the FSCS levy” badge on the Key Features Document or it doesn’t. It also shows the cost to the client of that protection in actual £ terms. If you pay for it you’re covered and if not you’re not covered. This is an explicit product levy that consumers should value. Additionally, if its simple products then one level of levy applies, if more complex/risky then a higher level applies.
    This has the merits of: making consumers aware of the value of the cover, shows them what it costs them and will give them a good indication of just how risky a product is. It would also have the result of removing the need for a big marketing budget at the FSCS.

  4. Its not finding reform that advice firms need, its cost reduction. As its a zero end game, the same amount has to be paid so it needs to be the providers and find management that can afford an increase to pay for any adviser decrease. Reform does not mean reduction.

  5. It seems to be the case that the FAMR “recommendation” to review the FSCS levy system was already pencilled in to be done. What a waste of time recommending something that was already on the agenda.

    Of course (as Steve D implies) the FCA knows the problem with the way the FSCS is funded, they know it’s not the polluter who pays its just easier for them to go for the soft target rather than institute real and meaningful change.

    This is not a new problem it should have been dealt with already

  6. Douglas Baillie 24th March 2016 at 9:23 am

    Part of the the problem stems from a stream of irrational and inconsistent decisions being made by the FOS, and this needs to be tackled at a much earlier stage.
    For example:
    Some highly resptable and experienced advisers who set up SIPPs for their clients are being held liable by the FOS for losses incurred by the investor who then went on and made their own decisions to purchase unsuitable funds such as Harlequin and Green Oil without reference to the original adviser.
    These losses should NOT be covered by the FSCS.

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