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Squeezing the FSCS: Providers fight back against increased contributions

The FCA and providers are set for further clashes after the regulator ruled last week that they must pay a quarter of advisers’ Financial Services Compensation Scheme bills.

In its final rules after a review of FSCS funding, the FCA outlined its requirement that providers must contribute 25 per cent of advisers’ bills to the lifeboat fund, despite widespread protestation from manufacturers.

Although the FSCS said it still needed to raise an extra £24m from advisers through an interim levy due to an increase in Sipp claims, blaming the frequent misselling of high-risk products, the FCA has thrown its support behind the increased costs for providers, saying they benefit from overall confidence in the UK market, and should be incentivised to design more readily understandable and customer-centric products.

Investment providers have seen their levy rise regardless, after the FSCS said last week it needed around £71m more than was forecast for 2018/19.

The regulator has also tried to make the lifeboat fund simpler, with life and pensions and investment intermediation to be merged into one funding class, and pure protection intermediation to be moved from the life and pensions class to the funding banner of general insurance.

On other issues, the FCA said there was widespread support, including plans to increase FSCS compensation limits from £50,000 to £85,000 for certain investment cases.

But what do the FCA’s changes mean for the relationship between the regulator, advisers and providers going forward?

A divided market

Plenty of large providers weighed into the FCA’s consultation, including the likes of Lloyds, St James’s Place and Standard Life.

The FCA notes “most” providers did not agree with its decision on increasing their portion of the levy, but adds the market did not come forward with any other viable suggestion.

The review says: “We have decided not to proceed with any of the alternative proposals because they add complexity and do not align with our policy intention to reduce volatility.” It adds: “While there are conflicting opinions, the need to secure appropriate consumer protection has been accepted consistently.

This requires, among other things, a sustainably funded FSCS.”

Some advisers argued the level of provider contribution should be as high as 75 per cent, pointing out that money from consumers eventually flows through to the providers of the underlying products used.

Advisers in favour of the levy say the interdependence of providers and intermediaries mean the benefits of consumer confidence created by the FSCS are shared.

Dennis-Hall-MM-700.jpgAdviser view: Dennis Hall

Chief executive, Yellowtail Financial Planning

It’s not the first time the regulator has looked at these issues. It says it will do something, then doesn’t do anything. Here we are again only this time the providers are picking up the bill for the bad guys. Is this because regulators can’t regulate ahead of the problem? Providers aren’t happy they’ll be stumping up 25 per cent but it looks like advisers are going to be paying money for all sorts of things. The FCA is yet to fix the compensation scheme funding, or the Ombudsman funding. The compensation scheme funding is really the good guys having to bail out the bad guys to pay for all this.

Advisers are also arguably in less of a position to pay out extra costs compared with providers.

Investment Quorum chief executive Lee Robertson says providers have to look beyond who is at fault and see the greater good. He says: “The deeper pockets are with the providers, and if the providers want a thriving advice sector, they have to think about stumping up.”

A provider speaking to Money Marketing admits Sipp operators have “let the side down” but says fault ultimately lies with poor regulation.

They say: “Some claims now being experienced were caused by Sipp provider failures from past dealings. The reasons for these failings can in at least some small part be blamed upon the failings of the FCA to adequately regulate these providers.”

They add: “I’m not sure I can accept the FCA’s statement that this move is a reflection of its policy aims. The people who benefit are the investors and if a FSCS levy is to be applied to anyone it should be them.”

Paying up the chain

Firms in the review who responded to the FCA are also hitting back against the proposal for vertically integrated firms carrying out their own intermediation to effectively have to pay twice to cover advice outside of their in-house offering.

The regulator acknowledges many believe certain sub-sectors of firms should also be exempt from provider contributions, particularly those that do not rely on manufacturing their own funds, for example discretionary fund managers and depositaries.

Whether DFMs should be classed as providers continues to be a hotly-debated topic.

Robertson says: “Vertically integrated firms are charging twice. Effectively they are taking more of the fee spectrum across their products and advice range so if they are charging more in fees, they should be paying more of the levy.”

Vertically-integrated giant St James’s Place declined to comment to Money Marketing on the release of the review, after questioning its elevated £16.5m contribution to the FSCS in its most recent results statement.

The regulator is still weighing up whether levies can be risk-rated as it begins collecting new data through Gabriel. With professional indemnity insurers already beginning to withdraw cover for advisers providing defined benefit transfer services, many of which are in vertically-integrated firms, Appleton Gerrard financial planner Kusal Ariyawansa says the regulator should make tighter restrictions that give advisers better chances with insurers so that the FSCS does not have to take even more pressure.

Speaking at Money Marketing Interactive last week, Ariyawansa said mandatory recording of all calls and meetings with clients would increase PI insurers’ trust in adviser credibility and ensure they pay a greater portion of FSCS bills.

He said: “The regulator should enforce the recording of all conversations. Because DB transfers are so complicated, it’s vital we have a robust process to give protection to both the consumer and the adviser.”

Tim PageAdviser view: Tim Page

Financial planner, Page Russell

Providers are generally raking it in off the back of DB transfers, so it can be argued that a little bit of burden sharing wouldn’t go amiss. The guys that play by the book will be paying all the fees at the end of the day. Until IFAs are forced to pay high PI premiums to have adequate PI policies that actually pay out when required and don’t fail and cause the companies to collapse and the firms to fall in on the FSCS, the cost will continue to rise. It is an indirect effect of inadequate PI premiums. IFAs do need to be thankful for small mercies though.

Quilter retail customer solutions director John Porteous says the FCA should be looking to wider reform and implement better rules reflecting the provider and adviser value chain. He says: “Reform of the FSCS has the power to create a fairer system that protects firms and customers, while also removing some of the barriers to growth. It’s about spreading burdens proportionately.”

Moving the goalposts

Increasing the threshold for investment claims by £35,000 is likely to make little practical difference overall, despite the FCA pointing to a seven per cent increase in claims over the current £50,000 cap that would have been covered by the higher threshold between 2010 and 2014.

Though the move affects less than a fifth of claims for investment businesses, the regulator argues increasing the limit will reduce customer confusion around various caps, reducing advisers’ workloads.

The current £50,000 cap for investment claims has been in place since October 2009 and is set to rise to £85,000 from April 2019.

However, the regulator says the majority of respondents who disagreed with raising the cap were investment intermediaries concerned with the knock-on effects for PII cover costs.

Although it does streamline reporting for advisers, the merging of life and pensions and investment intermediation into one asset class is also unlikely to have a significant impact on actually reducing the size of the total bill.

Downward pressure may come in the form of a new rule to stop PI insurers dodging payouts where the FSCS is a claimant and allowing the compensation to fall to the lifeboat fund.

The FCA’s review says: “The changes are intended to ensure that more consumer claims are paid by insurers, which could help to reduce the cost of the FSCS to other firms. We are proposing that personal investment firms should have PII policies that do not limit claims, where the policyholder or a third party is insolvent, or where a person other than the personal investment firm is entitled to make a claim.”

Moving forward, Quilter’s Porteous and Page Russell financial planner Tim Page are calling for greater attention to be paid to calls to introduce a risk-rated levy incentivising tighter risk management.

Porteous says: “It would encourage the right behaviour and ensure firms with a clean record and a well-managed business are not unfairly penalised.”

Following the spike in DB transfer claims and increasing PI bills, Page says some firms need more of a push to reduce risks in their businesses.

Page says: “If a risk-based levy is followed up, it’s going to be far more interesting than anything actually in the rules that have been published already. There’s nothing like being hit in the teeth with a higher levy to get one to change their business model, and that’s what is ultimately needed.”

Yellowtail Financial Planning director Dennis Hall says advisers will continue waiting for answers on more fundamental reform. He says: “I thought advisers were promised a proper review and resolution, but the regulator doesn’t seem any closer to that and while advisers still have the ability to pay, we will be squeezed.”

Comments on the FCA’s further consultation questions will be accepted until 1 August.

Expert view: Steven Cameron

Why providers should cough
up too

It is widely agreed that the FSCS is a good thing, but how it’s funded has been highly contentious for many years. The vast majority of customers are well served by highly professional firms, and in today’s climate need advice more than ever. But things can go wrong and customers need confidence they’ll be compensated even if the responsible firm is no longer in business. That benefits every firm in our industry.

For many years, life and pensions intermediaries have had to cope with volatile levies. More recently, they have repeatedly had to pay the absolute maximum within the scheme, something which surely wasn’t the original intention. And it’s the vast majority who don’t generate claims who are meeting these costs, which just doesn’t seem fair.

Aegon has called on the FCA to make providers and fund managers pay a greater share of levies for intermediaries in ‘affinity’ markets so I am delighted the FCA will require providers to pay 25 per cent of insurance and investment intermediary levies from the first £1.

So far so good, but we’re urging the FCA to do more, to find ways to reduce overall FSCS claims and to introduce risk-based levies so those firms undertaking riskier activities, more likely to result in FSCS claims, pay more in.

We have also proposed that rather than FCA fines creating a windfall for the Treasury, wouldn’t it be reasonable to funnel some back into the FSCS for the benefit of our industry and its customers?

Steven Cameron is pensions director at Aegon



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There are 10 comments at the moment, we would love to hear your opinion too.

  1. Here’s a thought. What about just levying those providers whose products have been the cause the most claims? They then should be levied at say 50%. It may possibly encourage them to do a bit of policing themselves to ensure their products are advised upon appropriately.

  2. Julian Stevens 10th May 2018 at 11:28 am

    “The FCA notes “most” providers did not agree with its decision on increasing their portion of the levy, but adds the market did not come forward with any other viable suggestion.” Oh really?

    See in this very publication.

    Or is it that the FCA doesn’t consider this proposal viable? If so, why?

  3. So the old adage, stills rings true….. its a rather unpleasant sandwich but every-one has to take a bite !

    What is in place at the moment is the good companies and the good consumer, is required to take the biggest bites …… like Harry has pointed out shouldn’t the ones causing these levies being asked to increase, double, triple, their bite size.

  4. Nicholas Pleasure 10th May 2018 at 12:20 pm

    MIFID requires that the very last halfpenny that a provider or adviser charges is detailed on disclosure documents but the costs of the FCA, FSCS, FOS and MAS are all hidden away within these charges.

    The product levy is the only transparent way of paying for this shambles and it can only work if unregulated investments and the advice on them is excluded from the FSCS. (You may just want to prevent regulated advisers arranging unregulated investments).

    A product levy would be clear and transparent, just like the FCA is always claiming we should be. For added transparency the costs of the different regulatory levys should be separated so that the general public can see the cost of the FCA, FSCS etc and decide whether it represents value.

    It would also be clear that if there is no levy on your product there is no FSCS protection.

    • Here, here and if it takes government to pass the rules then let’s get on with it; after all, what’s wrong with another bit of regulatory change on top of Mifid 2 and GDPR.

  5. Interesting note on the FSCS website regarding 3 SIPP companies back in January.
    There was no regulated adviser involved so who is paying for this, providers or advisers.

    Summary note on the basis of claims for the three SIPP Operators declared in default

    19th January 2018

    On 19 January, FSCS declared the following three Self Invested Personal Pension (SIPP) operators in default pursuant to COMP 6.3.2R on the basis that they are unable or likely to be unable to satisfy protected claims against them:

    Stadia Trustees Limited;
    Brooklands Trustees Limited; and
    Montpelier Pension Administration Services Limited.

    FSCS has received a number of claims for compensation in relation to these SIPP operators. In addition to being the SIPP operator, Stadia and Brooklands were also the trustees of the SIPPs. In relation to Montpelier, the FCA cancelled its Part IV permission on 14 October 2011 and the managing director of Montpelier was the subject of enforcement action by the FCA which concluded that he was not a fit and proper person on the basis of failings including in respect of due diligence on introducers and SIPP assets.

    FSCS may pay compensation to an eligible claimant if it is satisfied that their application for compensation relates to a protected claim. A protected claim is a valid claim made in respect of a civil liability owed by the firm (or successor) to the claimant (or successor) which is covered by FSCS.

    FSCS must make its determination whether to pay compensation in accordance with the COMP Rules. FSCS has carried out a thorough examination of the claims and taken external legal advice. FSCS is satisfied that there are claims where the conduct of the SIPP operators FSCS has declared in default gives rise to a civil liability to the investors because the SIPP operators failed to exercise reasonable care and skill, breached regulatory requirements and/or breached trustee duties.

    Many of the investments were higher risk such as oil investments, foreign hotel room investments and foreign vineyard investments and made by consumers with little investment experience and modest funds to invest. Often the investor was not actively looking for alternative pension investment opportunities but made the investment following a cold call by an overseas introducer who referred the consumer to the SIPP operator on a non-advised basis. In some instances, investors transferred all or the vast majority of their existing pension from an occupational pension scheme into the SIPP.

    Many of the underlying investments held via the SIPPs are illiquid and have little or no current value resulting in consumers having lost a substantial portion of their pension pot.

    Instances of SIPP operator failures include:

    Failing to carry out any due diligence on the underlying investment held in the SIPP.
    Receiving information that indicated that the non-advised investor did not understand the SIPP investment and/or that they were not receiving any advice and yet failed to seek clarification of the investor’s understanding.
    Failing to check that advisers who advised investors had the necessary FCA permissions.
    Did not have the necessary authority from the investor to authorise the underlying investment being made via the SIPP.

    Subject to the facts of each claim, given the role of the SIPP operator and the requirements of the COMP Rules, FSCS considers that the calculation of compensation on the basis of the value of the investment made into the SIPP is likely to provide the claimant with fair compensation subject to the requirements of COMP12.4.

    19 January 2018

  6. Robert Milligan 10th May 2018 at 1:12 pm

    I have some sympathy with the Providers, we have decimated the charges they historically imposed, some down now to as little as 0.4%,also a lot of them are not providing any of the Inappropriate products for which it seems the FSCS is compensating clients. However, those like SJP and the Product Providers who have vertical integration incorporating Advice facilitation should have an increased responsibility to the FSCS.

  7. It seems there is a consistent pattern to claims paid but the FSCS is sticking plaster on the underlying problem. The question is what exactly is being done to stop this problem repeating and protect retail clients?

    Surely that’s the job of the FCA and the measure of success on this, and an obvious KPI for the FCA, is that claims, and the accompanying stress and anxiety experienced by innocent consumers, reduce over time. If they don’t then the FCA are just spectating on the continued abuse of the very consumers they are there to protect. As has been pointed out, it’s also fundamentally unfair on good firms – a poor message.

    To quote the FCA:
    “We give more protection to consumers who are likely to have lower levels of financial capability, compared to those with
    more capability. The more complex and risky the product is, the more sophisticated the consumer needs to be before they can be expected to understand it.”

    Nice talk, now set aside politics, self-interest and prevarication and take practical action to make it happen. A simple start could be by banning unregulated products ending up in the hands of retail clients via a regulated firm. That should stop about 50% of claims. A start.

  8. Julian Stevens 10th May 2018 at 6:37 pm

    Is it legal for the FCA to decree that providers must pay into a scheme in whose liabilities they play no part? I imagine a few may well be consulting their lawyers to ascertain the potential merits of a legal challenge.

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