Mark Neale, chief executive, of the Financial Services Compensation Scheme, has told FTAdviser he is in favour of an overhaul of the levy system to reflect the risk posed by different types of firms, which would likely result in substantially lower levies for advisers.
Mr Neale said the unpredictable nature of the FSCS levies has been under discussion this year. He stressed that the Prudential Regulation Authority and the Financial Conduct Authority, rather than the scheme itself, has responsibility for calculating how the FSCS is funded.
One solution is the possibility of incorporating into the levies a risk rating, so that firms that present lower risks should pay lower levies than those that present higher risks.
This would likely favour advice firms, as Financial Ombudsman Service data, for example, has often shown that advisers represent just 1 per cent of non-PPI complaints.
In contrast. the investment intermediation funding class pays around a third of overall FSCS levies, often including redress bills relating to firms which some claim should not be grouped with advisers. Assigning risk ratings and agreeing on how to measure risk would therefore be critical.
Speaking to FTAdviser, Mr Neale said: “I would be in favour of looking to reflect risk in the raising of levies but if we are going to do that we need a good clear objective basis for measuring risk and a basis on which the industry can broadly agree… How would you do that on an objective and transparent basis?”
Mr Neale went on to place emphasis on retaining the support of the industry explaining that: “One aspect of retaining the industry’s support is trying to ensure that the industry sees our funding arrangements as broadly fair.”
He added that “another issue” is whether it is right for the FSCS to be funded on a ‘pay as you go’ basis, stating that pre-funding, whereby a predictable amount of money is raised from the industry that goes into a fund which is drawdown to meet failures, is also an option.
However, he added that were this to be the chosen method of funding advisers should be the party taking the lead in lobbying for such a change to take place. Mr Neale said it is not the responsibility of the FSCS, the PRA or FCA to make this decision as it is the advisers who are affected by it.
“Now that [pre-funding] would mean that our costs were much more predictable for the industry - on the other hand that means that we are taking money from the industry before we actually needed it to meet compensation costs.
“I think it is for the industry to make the call about where it sees the trade off there, certainly I personally have always been quite favourably disposed towards pre-funding because I think it does give the industry much greater certainty.
“I don’t think the regulators are likely to change our rules in that respect unless there is industry support for it, and I wouldn’t myself advocate doing it unless there was industry support for it. So I think this is a kind of debate which the industry needs to have with itself.”
Mr Neale also highlighted that there are trade-offs between the two funding mechanisms, stating: “On the one hand you get certainty about what the FSCS will be asking for each year but on the other hand it means we will have capital from the industry before we actually need it”.
He continued: “Equally we can carry on paying as you go but that will means that our funding demands, our levies, will be fairly unpredictable.
“It’s tough because if you have a predictable levy you obviously just build that in to your pricing structure, along with all your other costs of doing business, so you have much greater predictability and you can reflect that in the costs that you pass on to your customers.”
Chris Hannant, director general at Apfa said that the question surrounding pre-funding and pay as you go was a “tricky one” and that at the moment the idea of a pre-funded system is “not realistic”.
He said: “The new calculation method does introduce an element of pre-funding. Pre-funding would have the benefit of smoothing payment, it would have the disadvantage of effectively taking a load of cash out of the advice sector because that money has to be got upfront. So it is a difficult question.
“Certainly at the moment whilst levies are so high I don’t think there’s a realistic ...it’s not realistic for the finances of advice firms because the amounts being claimed are already very high. So in the short run I don’t see it [pre-funding] as a runner at all.”
