FTAdviser revealed last year that informal talks were underway with the FSCS and FCA on a review of compensation levies after the coming election.
In today’s consultation paper, the FCA launches a long-delayed consultation on capital resource requirements for financial advisers, proposing to double the minimum amount businesses must hold and scrap the fixed cost basis for larger firms.
Most firms will need to hold the greater of £20,000 or 5 per cent of their investment business income. Firms acting as principal or holding client money could have to hold 10 per cent of income.
The regulator intimates it hopes a change in the amount of capital firms must hold - and which would be called upon in the event of failure, including related to subsequent claims for redress - will impact “reliance” on the FSCS.
“These are the size of overall industry levy that spreads the cost of [personal investment firms] failure and its ability to recover specific failure costs.
“We believe that achieving a better balance of capital resources requirements could, under normal business conditions, lead to a reduction in the impact of failures and by doing so reduce the need for FSCS involvement.”
Last month, the FSCS announced the annual levy for the 2015/16 financial year, which revealed life and pension advisers are to be hit with a £100m levy, up from the scheme’s January prediction of £57m and three times the £33m levy last year.
In large part the increase was to pay for claims against failed advisers whose clients were recommended to invest in esoteric investments via self-invested pension wrappers.
In today’s paper, the FCA states the average compensation paid to consumers of failed firms is approximately £11,000 and personal investment firms are the “dominant channel” (51 per cent) for distribution of these products.
The regulator said it wants to reduce the cost of “mutualised failure” by changing the distribution of capital through a change to an income-based size metric, as well as the introduction of a higher flat minimum capital resources requirement.
“The cost of failure has to be funded in some way if consumers are to be adequately protected. We suggest that introducing a consistent approach to the setting of capital resources... as an ex-ante requirement is fairer than simply relying on FSCS alone as an alternative protection.
“Furthermore, if PIFs can settle legitimate compensation claims without failing then delays and distress caused to consumers should be reduced.”
One example of where the industry has not footed the bill for a failed firm is for sub-prime lender Welcome.
The FSCS declared Welcome in default on 2 March 2011, but the scheme paid compensation to customers of the firm with eligible payment protection insurance claims only as part of an “innovative” restructuring arrangement.
The regulator emphasised in the paper today that it is not possible to quantify what the cost savings would be, stating that doing so would require “modelling a wide range of firms’ behaviours as a reaction to the changed capital resources requirements”.
“In addition it would require the FCA to estimate the impact of firm failures making a number of assumptions that could not be supported without data on, for example, the cost to consumers in the event of PIF failure,” the paper said.
Last year Wealth Management Association chief Liz Field said it was working with both regulatory bodies on “what a review of the FSCS might look like after the election going into 2016”.
donia.o’loughlin@ft.com
