IFAs struggling with big rises in their Financial Services Compensation Scheme levy this year should be aware that they are not a one-off and all expectations point towards further rises in 2005.
This year's increases – of up to 1,000 per cent for some IFAs – are the result of a bigger than anticipated flood of endowment complaints. The FSCS's original estimate of 2,400 claims during 2004/05 was recently revised to 7,000.
But despite some high-profile collapses of IFA firms over the last year, including RJ Temple, David M Aaron (Personal Financial Planners) and Berry Birch and Noble Financial Services, only claims regarding RJ Temple have so far hit the FSCS.
Spokeswoman Suzette Browne says: “We have so far completed 168 claims for RJ Temple since we declared it in default. Of that number, 96 have been offers of compensation while the rest have been rejected. We have paid a total of £1.34m in compensation with regard to RJ Temple so far.”
RJ Temple had around 150 advisers when it collapsed compared with just 13 advisers at David M Aaron (Personal Financial Planners) when it went into voluntary administration last December. So far, claims against David M Aaron (Personal Financial Planners), which has not yet been declared in default by the FSCS, total around £1.8m.
Last week, the FSA banned David M Aaron (Personal Financial Planners) for misselling structured capital at risk products. The regulator says the firm missold a substantial number of Scarps between January 1998 and June 2003 and its internal risk assessment process was fundamentally flawed.
Browne says: “We are working very closely with KPMG, which is the liquidator of the Aaron firm, and are still gathering information about the firm's insolvency. We have to satisfy ourselves that the firm cannot meet any of the claims itself. But we have looked at a number of claims in readiness and are preparing ourselves for the point when we have to deal with them.”
Next year should also see the FSCS dealing with claims made against Berry Birch and Noble Financial Services.
In March, Berkeley Berry Birch transferred assets from Berry Birch and Noble Financial Services to the formerly dormant BBN Financial Planning, winding up BBNFS and dumping its liabilities on the compensation scheme.
All successful claims made against BBNFS, which at the time of wind-up had 150 advisers, will be paid by the FSCS.
But it is not only the failure of these firms that awaits IFAs next year. FSA managing director David Kenmir says: “I suspect that this year's levy is going to be smaller than next. Although pension review costs are likely to reduce, endowments will be ongoing and precipice bonds will start to make their mark. This year is not a one-off.”
Until this year, IFAs have been helped substantially in their levy payments by subsidies from product providers through the Pass scheme.
Pass founder Mark Penton says: “Three years ago, the FSA reviewed the funding arrangements of the FSCS and decided it was no longer appropriate for the FSA to have in-built subsidies for providers. Pass was set up for three years by providers and Aifa as an acknowledgement that IFAs would need transitional support to pay the levy but it was not intended to run for ever and a day.”
The first two years of the subsidy saw providers accounting for around 85 per cent of the levy required by investment firms. However, a decision was made this year, without the knowledge of Aifa, to cap the subsidy in cash terms rather than percentage terms, which led to a 70 per cent reduction in the provider subsidy to 15 per cent of the total.
ABI head of life and pensions Chris Kenny says: “Providers decided to cap the subsidy in cash terms as part of a gentle wind-down of the Pass scheme.”
Penton says there are fewer than half a dozen people involved in running the Pass operation and they are winding it down over the next six to eight months.
The move, coupled with increases in the levy for investment firms from £7.9m to £33.2m, has hit IFAs hard.
Aegon corporate development director Laurie Edmans says: “The way things have moved seem to have caught everybody out a bit. The impact of the decision by the providers to cap the levy has had a much greater impact than anyone expected, what with the increases in the FSCS levy anyway.
“When Pass was set up, the idea was that the IFA sector would stand on its own two feet eventually and providers would gently slide out of subsidising them. But, as events have shown, the slide has not been as gentle as anticipated.”
Kenmir has stated his willingness to speak to providers about the impact their cap is having on the IFA community. He says: “In the end, if providers want to keep the cross-subsidy capped, they must understand that many IFAs will therefore be unable to meet the levy and the FSA will then have to take them out of the market. Providers need to be clear on the impact their decision will have.”
As things stand, Pass will not continue beyond this year but talks are under way between Aifa and the ABI to find a way to continue the subsidy.
Depolarisation will cause further problems as providers will be unwilling to subsidise IFAs owned by competitors.
Kenny says: “Depolarisation makes the whole issue not at all straightforward and we have to work out whether we will continue to support IFAs and how that support might work. Simply saying the existing scheme will continue is not an option.”
Aifa director general Paul Smee acknowledges the difficulties that depolarisation will bring but says: “I am very concerned the subsidy should be continued in respect of business written pre-depolarisation.”
Money Marketing understands that at present the provider subsidy is unlikely to be extended but Kenny says there has been no collateral discussion with members about the issue yet and stresses: “We will carry on talking.”
