FSCS funding review brings mixed blessings

FSCS funding review brings mixed blessings

The FCA has proposed making product providers contribute towards intermediation claims as part of its Financial Services Compensation Scheme (FSCS) funding review.

Intended to reflect the “wider responsibilities of product providers”, the move, if implemented, will see the financial burden of intermediation complaints spread more equally between adviser firms and providers.

Richard Freeman, chief distribution officer for Old Mutual Wealth, agreed the proposal would have the desired effect of reducing the burden on intermediaries.

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Mr Freeman said: “Financial planning firms are typically small, local businesses without the capital resources to absorb sizeable costs without a knock-on effect on investment in other areas. 

“FSCS funding must reflect this when considering an appropriate contribution from advisers.”

The regulator has also suggested introducing a risk-based levy as part of the first consultation period of the review. A risk-based approach was first recommended in the Financial Advice Market Review (FAMR).

By contrast, the idea of a product levy – favoured by many advisers – has been ruled out due to the lack of “evidence that collecting a predetermined percentage of the product price would provide only the necessary amount of funding each year”, as well as legislative issues such as the fact that the FSCS would have to shift to a “pre-funded” model to build up a reserve for future claims.

Chris Hannant, director general at the Association of Professional Financial Advisers (Apfa), said a risk-based levy would see a reduction in the amounts paid by advisers because “it is a more stable bill”. 

Mr Hannant continued: “How we achieve that is slightly secondary to actually achieving those outcomes. Product providers have legal responsibilities under Mifid II over product governance, and making sure that their products are appropriate, so I think reflecting that in compensation arrangements is only fair.” 

In news that is potentially less positive for advisers, the regulator said it plans to look into raising the FSCS compensation limit in light of the introduction of pension freedoms. 

This could see the current £50,000 threshold extended to up to a maximum of £1m. The FCA said it would look into the effectiveness of limits between £75,000 and £1m.

Mr Freeman said that while it is “logical given the retirement market” to review the compensation limit, “it is also in the best interests of consumers and the financial planning sector to ensure claims do not fall on the FSCS in the first place”. 

“FCA data shows a third of claims come from high-risk products, suggesting that more could be done to manage the volume of compensation payments that fall due,” he continued. 

Currently at the first stage of the consultation process, which closes on 31 March 2017, the review will produce a policy statement and further consultation in the Autumn, with the proposed changes due to be enforced by 2018/2019. 

Additional alterations may be introduced by 2019/2020.