Advisers angry at big jumps in their Financial Services Compensation Scheme levies need to do more to back a better system, chief executive Mark Neale has said.
Alternative funding models for the consumer protection scheme suggested by HM Treasury, the regulator and financial services firms were published in the Financial Advice Market Review report in March.
The FCA will hold bilateral meetings and industry working groups on the options over the summer.
But Mr Neale told FTAdviser those unhappy with the current model - of compensation costs paid by those in the same sector as the failed firm that generated the complaints - must take responsibility for creating a new one.
“There is no point in moving to one set of funding arrangements that people don’t regard as fair to another set of funding arrangements that they don’t regard as fair,” he said.
Among the recommendations was a risk-based levy - long preferred by Mr Neale – where firms more likely to generate complaints pay higher levies.
“I’ve been a long term advocate of firms with risky business models or giving people advice about risky products paying a proportionately higher levy,” Mr Neale told FTAdviser.
But he said advisers need to engage with the consultation on solutions if they want that model.
“The key will be if we can find objective and acceptable measures of risk and we will need the industry’s help with that if we are going to go down this road,” he said.
One way is to assess business models, “looking for factors that correlate with the risk of the firm failing, which is broadly what the Pension Protection Fund does when it sets it’s levies”, he said.
Another is judge how well firms are equipped to absorb liabilities if they do mis-advise customers - “whether they have a decent professional indemnity insurance policy in place for example or a decent capital buffer,” he said.
Mr Neale said many firms’ professional indemnity insurance policies “don’t provide much protection because often the excess on the policy is greater than the capital the firm has available”.
Blair Cann, senior partner at Cuffley-based M Thurlow & Co, said he was very interested in the idea of a risk-based levy.
“We’ve always been very conservative and have ended up paying for people who use ridiculous schemes.
“A risk-based levy sounds like a very sensible proposal. Practical issues like who decided what is high risk and what isn’t will mean there is a lot of work to be done. But this is not an unreasonable suggestion.”
Another option raised in the FAMR report was bringing insurance intermediation, investment intermediation and life and pensions intermediation under a single compensation class, to spread costs.
Mr Neale said this would reduce the volatility of levies, but firms would be paying a share of costs for failures “completely outside their own field of business”.
The FAMR report also suggested the FSCS use its credit facility with banks to smooth the levies.
But Mr Neale said this option - “borrowing against the credit of advisers” - was “unlikely to be cheap”.
“We’d absolutely explore this, but my guess is the banks would want to charge rather more for borrowing on those terms over longer periods and against the credit of the adviser sector.”
Elsewhere, Mr Neale noted that although the FAMR did not address the topic of pre-funding, this did not mean it was off the table completely.
“Its upside is it reduces volatility because you are paying a predictable contribution year after year. The downside is you are inevitably taking money out of the industry before we need it to build up a fund.”
“If firms themselves said we think actually pre-funding would be a better way forward, it would give us greater certainty, then clearly we would look at that very seriously.”
ruth.gillbe@ft.com
