New Wealth Management Association chief Liz Field revealed today (14 November) that informal talks are underway with the Financial Services Compensation Scheme and the Financial Conduct Authority on a review of compensation levies after the coming election.
The association is working with both regulatory bodies on “what a review of the FSCS might look like after the election going into 2016”, Ms Field said at an event held by the wealth management trade body this morning.
Ian Cornwall, director of regulation at the WMA, commented that the Financial Services Compensation Scheme’s funding model is skewed as towards those firms that are consumer facing as he branded the existing model a “disgrace”.
Speaking at a WMA event held today, Mr Cornwall said that the WMA was unhappy with the way the FSCS is currently run as consumer-facing firms are the main funders of the scheme yet it is not these firms that often need to be bailed out.
After the event he told FTAdviser levies are typically based on the proportion of revenues earned from dealings with eligible retail clients. He cited the example of Catalyst, which promoted products to intermediaries but whose failure added hugely to the levy bill for investment advisers.
Mr Cornwall said: “One of the major flaws of the funding model which we are particularly upset [about]... there’s certain firms that can undertake activities [where there] is no associated eligible income stream.
“In other words they are doing activities that give rise to claims but there’s no eligible income stream so they never actually chip into the pot. The FCA were well aware of that at the time that the funding model was approved a couple of years ago.”
Catalyst was declared in default in October 2013, following an investigation by the FSCS and FCA to establish the extent to which Catalyst could be liable for claims made by investors in the Arm funds, which have been suspended since 2011.
Mr Cornwall added: “As per our response in 2102 we believe the FCA needs to research what activities firms can undertake which can give rise to claims on the compensation scheme but which under the current funding arrangements fail to get a contribution.
“We think its a disgrace to be honest, and we think that the level of compensation that firms have had to pay over the last five years in investment intermediation is appalling.
“We need a mindset that says: ‘what can we do to mitigate hit on the compensation scheme?’ and we question whether that mindset exists at the moment.”
A spokesperson for the FSCS said: “We meet with WMA on a regular basis, and are aware of their concerns regarding the current FSCS funding model, which we discuss from time to time.
“We look forward to continuing those discussions, although are not at present working with FCA and WMA together on a review of funding issues. The timing of any review of FSCS funding is a matter for the FCA.”