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Risk-based FSCS levy will cause advice firm closures, adviser trade body says


Adviser trade body Libertatem has criticised the concept of a risk-based Financial Services Compensation Scheme levy, saying it will threaten the financial stability of advisers’ businesses.

The FCA’s consultation on the future funding of the FSCS last month confirmed a risk-based levy is under review.

Under a risk-based levy, firms could be eligible for a discount if their behaviour reduces risk or fund a greater share of FSCS payouts if they are involved in high-risk product sales.

In order to make this possible, the FCA has proposed adding information on higher risk investment products to advisers’ Gabriel returns. This would come in the form of two questions, asking advisers if they recommend ‘non-mainstream pooled investments’ such as Ucis, and if so, how much of their income comes from these areas.

However, in a mail-out to members, Libertatem says applying additional charges to more risky firms is likely to be short-lived because many advisers would be classed as risky, pushing FSCS levies up and causing them to close, increasing levies for the remaining advice firms.

The letter says: “The FCA’s divisive answer is to split advisers between ‘risky’ and ‘safe’. Those who are proven to have advised on high risk products will fall into the ‘risky’ category.

“But for this to work, a significant number of advisers would have to be placed in the section, otherwise why bother?  Those designated as being ‘risky’ are likely to face both higher FSCS charges and higher professional indemnity charges, thus compromising the financial health of their business.

“They are therefore more likely to fail, and to phoenix, so we end up with less advisers paying more FSCS charges.”

It adds: “Ideas such as risk-charging are divisive within the sector and are doomed to fail.”



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There are 4 comments at the moment, we would love to hear your opinion too.

  1. Apart from the points that Garry raises, I don’t see how a binary system which classifies adviser firms as either high risk or not, with nothing in between, is likely to be either fair or workable. As he says, the additional costs for those lumped into the high risk category will (have to) be so much greater than what they’re paying now that they’ll probably break them, and the rest of us will be forced to meet the costs of all the uninsured liabilities that they’ll have left behind.

    The proposal to modify the GABRIEL system so that it actually asks relevant questions is all very well but it’s way, way too late. Due to inept regulation, the damage has already been allowed to happen. As a result, the industry is sitting on a steadily and unstoppably brewing volcano which has already started to erupt but which has by no means finished doing so. It’s likely to take the better part of a decade to wash through the system. And to think that Hector Sants was awarded (and looks likely to be allowed to keep) a knighthood for his part in it all.

  2. The problem, the challenge and the solution is being approached from the wrong direction. It is clear that non regulated investments are being covered by the FSCS, if a regulated adviser recommends them. Therefore the solution is to regulate the products and investments currently not regulated but considered viable and good advice. Then remove the unregulated investments from pensions unless an additional permission is held.

    95% of standard business can be conducted using regulated products if this where to be implemented. Why then should we have to pay out for unregulated investment failures via the FSCS, this was never intended and the loop whole should have been closed years ago.

  3. Trevor Harrington 25th January 2017 at 5:26 pm

    Would somebody explain to me why the entire FSCS Levy cannot be paid proportionately by those advisers who receive complaints in the preceding year ?

    I may also add that regulatory FEEs could be treated in the same way. Then we really would have the bad guys paying for the bad guys, and a proper financial incentive for them to cease their bad practices.

    FCA already knows the numbers of complaints received as it is in the RMAR. All they need is a five year old with a calculator to work it out.

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