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