The Financial Services Compensation Scheme’s chief executive says 2015 will be a year to remember because it contained the first time he was publicly compared to a concentration camp guard.
In an end of year round-up, Mark Neale told FTAdviser that his critic’s underlying point was that FSCS racked up compensations costs – “just following orders” – without much regard to the impact on levy payers who foot the bill.
“That’s not true, of course – we’re very conscious of the costs we impose – but it illustrates a dilemma,” he stated. “The FSCS is important to the public’s trust in the industry, but the compensation we pay is also a burden on the industry.”
One example was the failure of foreign exchange broker, Alpari, in January when the Bank of Switzerland broke the informal Swiss Franc/Euro peg.
Many of Alpari’s overseas customers told the FSCS that its prompt compensation had increased their confidence in UK financial services. To date the scheme has paid compensation of around £25m to over 9,000 clients and recovered £15m from Alpari’s estate.
In November the FSCS published our report on trust by professor Nick Chater from the Warwick Business School, underlining the issue of trust and showing, among other things, that it’s not only cost which deters people from seeking financial advice.
“Lack of trust in protection from mis-selling is also a factor; that’s where FSCS comes in,” said Mr Neale.
He explained that the report showed that there is a benefit to firms of being clear with people about FSCS protection and ensuring that protection is itself clear.
“So how do we square this circle and ensure FSCS protection – which must be affordable – plays a part in promoting trust in the industry?
“Our pay-as-you go funding system (raising levies as failures arise) continued to receive criticism from the industry throughout 2015. And I acknowledge their concerns: I know it is unpredictable and hard for firms to absorb.”
Mr Neale said that this is officially a matter for the Financial Conduct Authority to consider in their forthcoming funding review and urged advisers to put forward their suggestions for changing the current system.
“I hope that the review will be comprehensive in the range of options it considers. I hope it will consider whether firms can be better insured or capitalised to absorb their own liabilities without recourse to FSCS.”
He also expressed a wish for the review to look at the case for reducing the risk of negligent advice by restricting further what unregulated or exotic products can be recommended to ordinary retail investors – while maintaining protection for investors who nevertheless are still advised to buy them.
“We should not rule out some form of pre-funding as a way of giving firms greater certainty about FSCS’ levies. I hope we shall look again at how FSCS levies are distributed to see if they can reflect the riskiness of business models, so that the firms running the highest risks make proportionally higher contributions to our costs.
“In addition to our funding review, the Financial Advice Market Review could also have an impact on us,” he added.
peter.walker@ft.com
