Financial advisers in the UK have started lobbying their local members of parliament (MPs) after they were hit with an additional levy from the Financial Services Compensation Scheme (FSCS).
The lifeboat scheme said this was needed to pay for the increasing number of Sipp complaints.
The Personal Finance Society (PFS) created a template letter help advisers send complaints to their MPs.
The matter was then brought up in the House of Commons by Scottish Nationalist Party shadow spokesperson for infrastructure Ronnie Cowan, on 10 February 2020.
He asked economic secretary to the treasury John Glen: “What discussions officials in [HM Treasury] have had with stakeholders and representatives from the Financial Conduct Authority (FCA) on the review of the calculation of the FSCS levy?”
Glen replied: “The FSCS is an independent non-governmental body. [It] carries out its compensation function within rules set by the FCA and the Prudential Regulation Authority (PRA), who are also independent from government.
“The FSCS levy is set annually by the FSCS within the limits set by the FCA and PRA.
“It is for the FCA and PRA to consider the impact of the levies on the firms they regulate, acting in line with their statutory duties.
“The government has no role in setting the levy,” he added.
According to Companies House, however, the FCA is not really independent from the government, as the Treasury is listed as the only person or entity with “significant control” over the regulator.
‘Unfit for purpose’
The PFS has been campaigning to reform the levy system for the past few years and has contacted the Treasury, chancellors and FCA on the matter.
“We remain in talks with the FCA and Treasury about the impact of the FSCS levy, increased Financial Ombudsman Service (FOS) compensation limit, and hardening professional indemnity (PI) market on consumer access to financial advice, the disproportionate financial impact on distinct consumer segments, as well as the impact on the sustainability of the personal finance profession in direct conflict with the core objectives of the Financial Advice Market Review (Famr),” Keith Richards, chief executive of the PFS, told International Adviser.
“The PFS has raised concerns that the FSCS is increasingly proving unfit for purpose, and the growing concern over DB transfers is likely to compound the level of liability placed upon it, which will result in poor outcomes for consumers and the market alike.
“We have offered Treasury and FCA a potential solution in the form of a ‘savings and investment monetary protection and education levy’ (Simpel), collected centrally by government and paid into a pooled risk-based fund which would eliminate the need for PI insurance as the fund would operate in a similar way, including an excess for upheld cases.
“The market accepts the responsibility to contribute to regulation and protection and combined the necessary funding could be achieved without any accusations of bias, unfairness, or punitive prioritisation that makes one sector feel it is carrying the burden for all the others.
“This solution would smooth out the costs of financial compensation, while removing the need for professional indemnity insurance (PII).
“John Glen was factually answering a specific question about the calculation of the levy which, of course, falls within the remit of FCA/FSCS, as he stated.
“But only the government has the authority to undertake a complete overhaul and reform a broken FSCS and the evident failure of PII, which would require legislative change,” he added.
Funding model overhaul
The FCA already carried out a review of the FSCS levy model in 2018, and concluded that it was “funded fairly”.
But many advisers agree with PFS’ Richards, and believe the funding of the lifeboat scheme is not working anymore.
Tim Sargisson, chief executive of Sandringham Financial Planners, told IA: “The FSCS is unfairly placing the burden on good, honest financial advisers.
He deemed the levies have been “eye-watering”, considering the “£213m ($275.4m, €252.3m) for 2020/21, as well as an extra £50m supplementary fee for 2019/20″.
“Advisers are forced to pay an equal share of the levy regardless of whether they have a faultless record or whether they recommend risky investments, such as unregulated investment schemes, which often is behind the high FSCS levies,” Sargisson added.
“The FSCS is a classic example of moral hazard, because the risk is borne by others.”
Make the ‘bad guys’ pay
When asked about the system, director of Perceptive Planning Phil Billingham said it seems as if the “good guys” in the sector are paying for the mistakes of the “bad guys”.
“The majority of the levies have always historically been from poor products, and therefore a product levy has always been a sensible way of doing things,” he added.
Billingham believes that fines imposed for mis-selling and poor advice should be channelled into the FSCS, so that “the bad guys are seen to pay, and the money is not taken out of the sector”.
He added that a private levy should also be established.
“Anything that’s unregulated, like derivatives, should be asked to pay a higher levy as a percentage. So that when those schemes fail, there are funds available to pay out the consumers affected.
“The good guys who are remaining in the business shouldn’t be asked to pay 5% of their turnover and have to cut staff and employment in order to fund the bad guys.
“That is clearly a broken economic model.”
