Alternatives needed for when the FSCS levy breaks
Advisers must adopt a united front in tackling FSCS levy.
The history of financial services is littered with well-intentioned initiatives. Always motivated by a real issue that needs addressing, every drive to enhance the industry has seemingly caused a butterfly effect of unintended consequences. Solving one problem often comes at the cost of causing several more.
Stakeholder pensions were designed to provide adequate, affordable retirement savings for the masses with none. But rather than encouraging the poor and disenfranchised to save, the schemes became a must-have vehicle for middle-class offspring, run at great cost to the providers.
Depolarisation was designed to clarify the distinction between types of advice, believing consumers did not grasp the difference between fees and commission. Having identified that two classifications of adviser was too confusing for consumers to understand, the powers that be decided to ‘simplify’ things by adding a third classification. The public, predictably, remained apathetic and confused.
Now, eight years later, we have the RDR, which is attempting to redefine advice again in a way consumers will understand (or at least bother trying to understand). It remains to be seen whether this will be any more successful in inspiring a public fascination with financial services, but it is pretty much accepted that the new regime will force swathes of the public away from advice completely.
We will also have to wait to discover whether auto-enrolment, the gender directive or any of the other tweaks to legislation being introduced at all levels of financial services regulation are effective in ending confusion in their corners of the industry.
Whatever happens, we may need to remind ourselves that all of these changes were introduced with the best of intentions.
It is worth remembering too that the Financial Services Compensation Scheme (FSCS) was formed to provide a safety net for consumers and reassure them in the face of growing mistrust of financial services as a whole.
The FSCS levy is not popular, but what tax is? The inherent unfairness is a common grumble; it penalises those who have done nothing wrong. Those responsible for defrauding investors are kicked out of the industry while those left behind are expected to fund the compensation that will make right their wrongs.
But for all these complaints, there are few viable alternatives. Even if stronger, preventative regulation was imposed, the law rarely prevents wrongdoing – locks only keep out honest people.
The unforeseen collapse of several high-profile companies since its introduction has caused the cost of the levy to spiral, exacerbating its reputational problem. In spite of more than one round of government subsidies, the total levy has doubled from £131.7m in 2008-09 to £265m for 2012-13.
But in spite of the levy’s unpopularity, the amount it needs to charge is understandable and largely understood.
More from Jon Cudby
- Pension reform should not be rushed
- Past habits are no defence for mistreating customers
- Pension debate must go beyond the industry
- Cognitive dissonance undermines our ethical values