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.”