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Should public pay for compensation cover?

Advisers say the Financial Services Compensation Scheme could successfully be replaced by private insurance on financial products, as the European parliament prepares to launch a study into alternative investor compensation schemes.

Last week, Money Marketing revealed that long delays are expected in resolving differences on the EU investor compensation scheme proposals after the European commission, parliament and council failed to agree on compensation levels and whether schemes should be pre or post-funded.

The European parliament is launching a study that will focus on possible alternatives or complementary systems to the ICS directive, in particular, the use of private insurance.

A private insurance solution could see investors pay a premium in exchange for cover in the event of a firm defaulting.

Advisers say private insurance could increase transparency on the costs of compensation and help to identify riskier products.

Anand Associates managing director Bhupinder Anand says: “Optional insurance would mean people choose whether they are covered and would echo the transparency agenda in the RDR. Someone would have to pay for it, which would be the consumer, and they should be able to choose whether to take out insurance or not.

“Similar to the way a market for insurance against tax inspections has come about, this would help develop a market for these products and the due diligence that insurers would have to carry out on products could help consumers gauge risk.”

But Anand warns it could put people off financial services. He says: “If an adviser offers insurance with a product, it could suggest there is something wrong with it and spook people.”

Philip J Milton & Company saw a 756 per cent rise in its FSCS levy from 2010 to 2011. Managing director Philip Milton says the firm introduced a 2 per cent charge on top of management fees as “insurance” against the cost. He says: “Making it compulsory would introduce economies of scale and the charges for insurance would be very small but pricing the risk would be a nightmare.”

Evolve director James Norton says the cost of the insurance would need to be kept low. He says: “If people were told there was no FSCS, they might take up insurance if the cost was low but they could be put off by higher costs.”

The FSA has delayed its review of the FSCS’s funding model while the European authorities thrash out the ICS directive. The FSA’s policy statement, scheduled for September, is likely to be delayed.

Under the ICS directive, the European Commission proposes raising the maximum guaranteed compensation from the current €20,000 to €50,000. The parliament agrees but the council only wants it raised to €30,000.

The three bodies agree that individual compensation payouts should be capped at €100,000. The council does not want schemes to be pre-funded, while the commission wants national schemes pre-funded within 10 years and the parliament within five years.

Because of the failure to agree the proposals, the directive is now stuck at the start of a second reading in which the council is supposed to publish its position and the other two institutions propose amendments to it.

However, Rickard Ydrenas, policy adviser to Olle Schmidt, the MEP guiding the ICS directive through parliament, says the council refuses to bring forward a proposal until the parliament clarifies its position, while the parliament cannot publish its position before the council lays out a proposal. In an attempt to break the deadlock, a group of academics charged by the European parliament will now look at alternative funding models and structures. It will meet for the first time next week to set out its terms of reference.

The finalised directive will help inform how the FSCS is funded and the level of cover it offers, thought the FSA has said it could push ahead with its review without clarification from Europe if delays continue.

The FSCS’s compensation limit is currently £50,000 for investments.

Anand says: “The current funding methodology is wrong. Ultimately, consumers should fund the compensation scheme as they are the ultimate beneficiaries.”

Investor compensation scheme directive

  • The European Commission proposes raising the maximum guaranteed compensation level from the current €20,000 to €50,000, the parliament agrees but the council wants it raised to €30,000.
  • The three bodies agree that individual payouts should be capped at €100,000.
  • The council does not want schemes to be pre-funded while the commission wants national schemes funded within 10 years and the parliament within five years.

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Comments

There are 3 comments at the moment, we would love to hear your opinion too.

  1. Very simple solution. Simply apply a levy on every policy that is sold which is held centrally by Government/FSCS or FOS. Clients get the advice and part of the cost of that advice is a very small amount of money, which when paid by a lot of people, amounts to a massive pot that can be called upn by FSCS if it was needed but only as a LAST RESORT, not a first response. It may be a tax by any other name but if there was a one-off charge for lump sum business of any description of say £48 and on regular premuim investment business of £4pm for just the first year then this could go a long way to solving the problem. If the total of the pot was exceeded in any year then the FSCS could apply whatever levy is needed to the correct sub class and we could have a much better run Compensation Scheme. I am sure some of you will be thinking it is wrong to levy clients because they may end up paying for something they had nothing to do with but thats exactly what is happening with advisers. Atleast the burden would be shared and our costs would reduce so have more chance of staying profitable to be able to service clients well into the furure. At the risk of sounding stupid, does anyone see a flaw in this? (I except there would be issues on how to deal with it so I am talking in principle). I would like to hear your comments

  2. What a strange regulatory world we inhabit.

    The FSA tells us that we must have true transparency – things like high allocation rates must go because the consumer might be led to think that he’s getting something for nothing.

    Commission must go because the consumer might be led to believe that advice is free.

    I reckon the FSCS levy should go because consumers might be led to think that they’re not paying when actually they are, and our fees, etc have factored in the various levys in when being calculated.

    Let’s, for once, have some commonsense and continuity from the FSA.

  3. What I find amazing over the years is that people who we have never heard of before now voicing their concerns about all sort of regulatory issues which many of us have been going on about for years, but now they are getting big bills and increased costs they are suddenly complaining.

    When the solid foundations you have built over the years start being sucked from under you it does pay to keep an eye on what is going on before there are little foundations left.

    If the voices had been greater in number and louder then we may not be where we are now.

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