Like many in the industry, I was encouraged by the Financial Conduct Authority’s decision to publish its discussion paper considering options towards Financial Services Compensation Scheme reform.
The publication of this document is, in my view, a vindication of the extensive work Pimfa has done in this area over recent years, as well as the FCA’s recognition that the FSCS levy has become unsustainable.
There are three questions that need to be answered as we move towards lower levels of FSCS funding:
- What steps can we take to ensure that the current bill becomes more manageable for businesses?
- How do we ensure that any reduction in the bill is sustainable over the long term?
- How do we move towards a model where those who are more likely to call on the FSCS are required to pay more for it?
In many respects, the FCA’s discussion document only really deals with the third question and by doing so misses the point. There is absolutely scope to consider how the FSCS levy is reconfigured, but any approach taken needs to be practical and ensure that it is consistent with other compensation regimes like the Financial Ombudsman Service.
Rather than simply the cost of funding, it is ultimately the drivers of claims on the FSCS that need to be addressed longer term. While the FCA has hinted its recognition that reform lies well beyond the compensation framework review, we have long been of the view that it is the current regulatory framework and, in particular, the standard of supervision that has been responsible for much of the harm that has ultimately fallen onto the FSCS over recent years.
The FCA seems committed to improving their standard of supervisory oversight and to that end recent work to improve the quality of supervision by moving towards a data led approach, a more thorough and intrusive authorisation process, plus tweaks around the edges of financial promotions and the high-risk investment market are all steps in the right direction.
But this is a journey and the levy, by its nature, is backwards not forward looking. Colleagues at the FSCS tell me that it takes multiple years for harm to work its way through the system and onto the FSCS. For example, we are yet to really feel the true impact of pension freedoms despite being aware of the many scandals that surfaced as a result of them.
So, what steps can we take to ensure that the current levy becomes more manageable?
The most obvious and easiest area to explore is the utilisation of FCA fines. These are currently diverted towards the Treasury with a small amount used towards charitable donations. We do not propose re-diverting funds that are earmarked for charitable endeavours but, looking at last year alone, FCA fines made up around 80 per cent of the total FSCS levy.
It is within the gift of this government to ensure that a percentage of these are diverted, not towards the exchequer but towards the FSCS.
Were we to adopt this model, last year alone the vast majority of the FSCS levy would have been funded by businesses who had breached FCA rules – the purest imaginable distillation of a ‘polluter pays’ model.