The Financial Services Compensation Scheme’s 36-month funding model is working “reasonably well”, according to chief executive Mark Neale, who argued that while pension advisers have been hit with additional levies, investment specialists have avoided them.
Speaking to FTAdviser, he defended the new funding model, which is still based on pre-funding levies from sub-classes but is modelled over three years to avoid the need for interim levies.
However, in March the scheme revealed a £20m interim levy for life and pensions intermediaries relating to “bad advice” given on Sipps. Mr Neale said while top-up levy risk was reduced, the scheme never promised it would be eliminated entirely.
One month later pension advisers were hit with a maximum levy of £100m for the coming financial year, up by 75 per cent from the January prediction of £57m and three times the £33m demanded from the sector at the time of the annual levy last year.
Mr Neale said that claims over unregulated investments in self-invested pension wrappers had created a “new area of compensation” that is impacting on one advice sub-class, but he also highlighted that investment adviser levies have been tempered.
Investment intermediation firms will see a decrease in their levy this year from that forecast in January, with the final bill of £116m down £9m from the estimate but up from £112m levied last year.
“Circumstances like the escalating amount of Sipp claims have essentially created a new area of compensation, which creates knock-on costs that have to be met.
“What I would add though, is that there have been no supplementary levies landing on investment advisers recently, it’s just been where bad advice has been given by life and pensions advisers.”
Mr Neale explained that this £100m figure was the maximum that can be charged and was not movable between the triennial reviews. “The costs can go up or down depending on the volumes of claims we actually receive,” he added.
The Financial Conduct Authority, which conducts the review, stated that the last one concluded in 2013, so the next one would begin next year.
“I can confirm that investment intermediation firms will see a decrease in their levy bill,” said Mr Neale. “This is because of a reduction in the costs relating to other investment defaults, and an expected increase in recovery forecasts for the coming year; including for [forex trader] Alpari.”
Chris Hannant, director general of the Association of Professional Financial Advisers, said last month that the source of the problem needs to be tackled by the regulator rather than spreading the levy across the funding sector.
The Financial Conduct Authority responded that it cannot use product intervention powers on unregulated investments.
Many advisers believe that Sipp providers should help shoulder some of the cost, with Lowland Financial managing director Graeme Mitchell telling FTAdviser that more needs to be done to avoid these issues arising in the first place.
“In what other industry does a firm have to set aside a quarter of their capital every year for something like this, while Sipp providers have been able to cover capital adequacy costs by increasing fees and exit charges,” he commented.
Mr Neale responded by stating: “I appreciate costs can fall heavily on smaller firms that do not specialise in Sipps.” He added that while other sectors are not yet being levied to cover the cost of Sipp claims, that remains only a possibility if costs exceed £100m.
Daren O’Brien, director at Aurora Financial Solutions, said that he expects any previous advice issues in relation to unregulated investments via Sipps are now a thing of the past.
“Most IFA’s that were selling these have left the industry when commission was banned and fees are a now a norm, so hopefully most of these issues and products have been identified and the clients are being compensated.
“Although I don’t like paying for IFA’s who have mis-sold products, it’s part of the industry I’m in and part of the protections that clients have and so I’m willing, not happy, to pay them.”
peter.walker@ft.com
