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Stephen Womack: Risk-based FSCS levy could limit misselling scandals


Regulatory costs in all their guises cost financial advisers an estimated £475m last year, according to Apfa. That figure is set to rise again once the full numbers are in for 2015, not least because of the dramatic hike in the Financial Services Compensation Scheme levy for IFAs.

The latest FSCS bill for my firm has now soared well past the £100,000 mark – a big chunk of unplanned spending for any business to stomach. That is money that could be better used to serve our clients. It could more than cover the salary and associated costs of employing two extra technical assistants, for example.

The latest hike in FSCS levies has been prompted by claims arising from Sipps: in particular, unsuitable and unregulated investments within them. One issue has been the contentious way in which some advisers and Sipp providers have found themselves being held responsible for DIY investment decisions taken by a client but “enabled” by the provision of the Sipp. To my mind, this is akin to suing Ford because a driver zooms through a 30mph limit at 60mph in his Ford Focus.

But regardless of the rights or wrongs of these claims, they have again highlighted the flaws of the current “pay as you go” system. It leads to lumpy and unpredictable costs. In some cases, firms that have never even advised any Sipp clients will be left struggling to find the cash to pay for the mistakes of others.

To his credit, FSCS chief executive Mark Neale acknowledges the problems with today’s levy system. I was at the Money Marketing Brave New World retirement conference in London last month when Neale spoke on the issue. “We get that firms find it difficult to absorb these unpredictable calls for funding and find it hard to pass those costs on,” he said.

So, in response, the 2016 FSCS funding review is going to consider different ways to structure the levy, including, intriguingly, a switch to “risk-based pricing”. A risk-based levy might, for example, take more account of a firm’s professional indemnity insurance. Those firms that paid higher premiums to buy insurance with a lower excess might end up with a smaller levy. Another approach would be to look in more detail at the mix of business an IFA writes. A firm with high levels of contentious business would face a higher levy.

It is good to see fresh thinking, although the Q&A session with Neale at the conference very quickly revealed the challenges in a new approach. How do you define risky business? And how do you keep track of who is writing what business in a way that makes the levy an accurate reflection of their current advice mix? The FSCS acknowledges it does not have that level of “granular detail” at the moment.

For me, the big win with a risk-based levy might be a switch to a system where regulators have to collect far more timely information about the advice being given. If they did, they might have a better chance of nipping emerging issues in the bud before any poor advice grows to become a multi-million pound claim.

That is surely better than today’s approach, which can unfortunately let a problem fester before then running an expensive whip-round to deal with the consequences.

Stephen Womack is a chartered financial planner with David Williams IFA


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There are 5 comments at the moment, we would love to hear your opinion too.

  1. For Neale to say “We get that firms find it difficult to absorb these unpredictable calls for funding and find it hard to pass those costs on” is somewhat contrary to his statement only a few months earlier that “the way in which the FSCS is funded is working fairly well”. If, as seems to be the case, all that involves is deciding how much more money the Scheme needs and then sending out invoices with the threat of de-authorisation for any firms who refuse to pay, I suppose it is. Pay up or pack up.

    But Mr Neale’s feigned sympathy doesn’t in any way actually address the quantum of those levies and he’s on record as having said that he’s fundamentally opposed to the idea of a product levy, whilst proposing no alternative funding model. So what’s he spouting? Insert your chosen word/s here:

    As for the issue of advisers being held liable for the consequences of clients making their own (unwise) investment choices by way of a SIPP set up by said adviser, on the grounds that by so doing they made it possible for the client to do something off his own bat, that really does seem to be fundamentally unjust. If this is the stance of the FOS, then we may as well all steer a mile clear of a SIPP ~ in fact, of ANY investment product within which the client can make his own investment decisions without seeking our advice. If it goes wrong, we’ll be blamed merely for having made it possible for him to do something stupid.

    As for the provision of advice on unregulated products, the FCA and its effing useless GABRIEL Returns are fundamentally at fault for failing to ensure that firms so doing have in place appropriate PII coverage for such activities.

  2. They certainly need to do something because we are not that far away from imploding as a sector. Surely the regulator already has this detail in the GABRIEL reports sent by every firm? What more do they need (other than someone to accurately look at the information to see what is happening.

  3. Every time that Mark Neale opens his mouth he seems to inadvertently make the case for a product levy. A risk based system cannot work unless you have real time product and advice sales records – that basically means a daily GABRIEL return for everyone. Without the ‘risk based’ bit you just have the fiasco we have at the moment which as Marty Y correctly states will eventually cause the sector to implode.

    A product levy can be risk based simply by considering the FSCS claims history for that product type. This will also have the effect of making risky products less attractive and hopefully by that means, reducing claims.

    There could be a fixed levy for ‘advice only’ which we simply charge direct to the client. Everyone charges the same.

    Not perfect, but it sounds like a workable system.

  4. Trevor Harrington 22nd December 2015 at 5:53 pm

    A product based levy will not work for lots of reasons – the biggest one of which is that you will simply give the regulators, in all their various guises, open house to charge just what the hell they want. I guarantee the the current regulatory cost will double within 5 years if you put in a product levy – it may only be a small cost per product sold, but it is not fair to the client, and it has absolutely no restrictive effect on those perpetrating the crime.

    The answer is simple, and self regulating.

    The total annual cost of the entire regulatory system should be paid by those who receive the complaints, in direct proportion to the number of complaints which they received, in the preceding year.

    Pretty simple really … it will also largely resolve the problem phoenix companies ducking their complaints liabilities too.

    I have advocated this for years (at least 25 years), and I have never had a viable explanation why it is not adopted. It could easily be instigated within a month or two, it will save regulatory costs, and most importantly it will make those pay who deserve to pay, in direct proportion to their crimes.

  5. Trevor H ~ On just what evidence are you basing your assertion that the introduction of a product levy would result in a doubling of regulatory costs? If none, is it not just a pessimistic hunch? My view (FWIW) is that a product levy is the only viable alternative mechanism to what we have at present, allied to the FCA doing its job properly by ensuring that no firm advises on anything outwith the scope of its PII cover and stamping hard and swiftly on those that do. Are not such practices (unprevented breaches) the primary reason why so many firms that have sold UCI Schemes are unable to meet their liabilities almost as soon as the claims start rolling in and then fold, dumping those liabilities on the rest of us by way of the FSCS?

    If no regulated firm was able to sell ANYTHING in respect of which it didn’t have proper PII cover, such sales would (in theory at least) fall away almost to nothing overnight. And such sales on the part of unregulated firms wouldn’t be our problem.

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