The Financial Services Compensation Scheme’s chief executive has given his verdict on recommendations for a shake-up of his organisation’s levy.
In his latest industry blog, Financial Services Compensation Scheme chief executive Mark Neale stated that the Financial Advice Market Review final report has given his organisation “plenty to get our teeth into”.
Last May, the Financial Conduct Authority revealed it would undertake a formal review of the FSCS funding model by the end of 2016, in a move designed to limit the burden from industry claims.
This was rolled into the FAMR, which last month recommended the review should explore risk-based levies, reforming the FSCS funding classes and whether contributions from firms could be smoothed by making more extensive use of the credit facility available to FSCS.
In his blog, Mr Neale set out to prove that contrary to popular belief, the compensation scheme does not have a “jaundiced view of the advice market”, instead calling it a “highly professional” industry.
“The trouble is that failures, when they do occur, can be very expensive, and continuing consumer confidence and trust in the industry depends on FSCS protection.”
He pointed out that since 2009 to 2010, the FSCS has paid out £1.5bn for claims against advisers, but more than £450m of this is accounted for by just three big failures: just under £331m for Keydata, £62m for Catalyst and £58m for Arch Cru.
“In a pay-as-you-go funding system like ours, these unexpected costs – passed on to firms through our levies – can be very difficult to absorb, especially for small firms,” said Mr Neale.
He welcomed all three of the FAMR’s proposals for FSCS funding reform, commenting on each.
Tackling the possibility of reflecting the riskiness of firms’ business models in allocating levies, Mr Neale noted that this is something he has urged for a long time.
“The challenge is, of course, to find an objective and widely accepted way of measuring risk in the relevant funding classes. We shall need the industry’s help with this. But it’s certainly not impossible.”
The review’s second suggestion was to reform FSCS funding classes, so levies are pooled more widely across a single intermediation class.
Mr Neale mentioned that when they published an historical analysis of levies on advisers since 2010, it showed significant volatility in the levies on individual intermediation sectors, but a much smoother profile for advisers as a whole.
“The peaks and troughs broadly balanced out,” he stated, adding that of course that would be likely to cut across the current sector based classes.
The final proposal was for the FSCS to use its existing credit facility with borrowing from a consortium of banks to smooth the peaks presented by a Keydata-style failure.
Again, this was accepted as a viable option, although Mr Neale said the current credit facility is designed only to deal with the short-term cash flow demands that, for example, a major banking failure would impose on FSCS. “We must pay out in seven days, while our levy takes a month to collect.”
Mr Neale promised to explore the cost of a longer-term facility, to consider how in practice, the FSCS could judge when to borrow and decide over what timescale to re-pay any borrowing – and on what terms.
Malcolm Coury, managing director of Money Wise IFA, commented that this is definitely a step in the right direction, although “tinkering to appease the advice sector” does not deal with the fundamental flaw of fines collected by the FCA no longer being used to compensate victims of mis-selling.
“If the system reverted to its previous funding model of the wrong-doers paying for the wronged, the system could largely, if not totally, self-fund and the cost to advisers would fall dramatically.
“So long as the fines are being taken by the Treasury and the compensation payments are being paid through levies, the fundamental flaw in the system remains.”
peter.walker@ft.com
