FCSC levies come under the FCA's microscope

The FCA also has a separate agenda, as it sets out to review the level and breadth of cover provided by the scheme, which adds a further dimension to the funding debate.

Last year the FSCS’s costs were £375m and it responded to almost 37,000 claims. The obvious challenge faced by the FCA is to balance the need to meet its consumer protection objectives with the fair treatment of financial services firms, be they product providers or intermediaries.  

Following the first consultation paper published in December last year, concerns were expressed about how firms pay into the scheme, however well they manage their risk and however well they protect customers. The FCA stated in the paper that it is trying to align the funding of the scheme more closely with the risks associated with the different types of business firms carry out. 

To that end, the FCA is seeking views in consultation paper CP/36 on the following, with a view to reducing the volatility of FSCS levies and to align better the risk profiles of firms in specific classes:

• Merge the life and pensions and investment intermediation funding classes and leave the rest of the structure as it is currently (with the addition of provider contributions to all of the intermediation classes).
• Move pure protection intermediation from the life and pensions intermediation funding class to the general insurance distribution funding class. 
• Require product providers to contribute 25 per cent of the compensation costs falling to the intermediation classes.

As a result of these changes, small firms in the life and pensions intermediation class and the investment intermediation class would see levies significantly reduced. Naturally, providers are less keen.

Responding to what is seen as a proposal that insurers should contribute towards the costs of intermediary failure, the director general of the Association of British Insurers (ABI), Huw Evans, said: “The FCA’s proposal gets the balance wrong and seems to go against the fundamental principles of FSCS funding – that those responsible for the failures are the ones who pay. Expecting providers to foot the bill for intermediaries they have no control over is entirely misplaced and will continue to be widely opposed by providers.”

The FCA also proposes that:

• Personal investment firms (Pifs) should be prevented from purchasing professional indemnity insurance (PII) policies that contain exclusions for the insolvency of the firm or any related party.
• Pifs should pay capital into a trust account or purchase a surety bond (in lieu of or in addition to existing capital requirements). The aim of these proposals is to ensure that more consumer claims are paid for by firms or their insurers, which would reduce the cost of the FSCS to other firms. The FCA has said any money put in trust could be released six years after the firm ceases to carry out regulated activity, but more work would need to be undertaken as to how much would be required or how the sum would be calculated.

More generally, the FCA is seeking views on whether to:

• Increase the compensation limit for investment provision, investment intermediation, home finance intermediation, and debt management claims to £85,000 to reflect changes to the options available to consumers when they retire. 
• Change the limit for claims in relation to the intermediation of long-term care insurance that is a pure protection contract in line with the limit for other kinds of pure protection claim, at 100 per cent of the claim, instead of £50,000.

The FCA does not intend to take forward proposals to extend FSCS protection to loan-based crowdfunding or to financial promotions.

According to the FCA, between 2013 and 2016 a third of all claims paid out were associated with non-mainstream products sold by advisers. Research carried out among advisers by AegonUK  reveals “strong support for some form of risk-based levies (RBLs).” As part of this evolving risk-based levy model, the FCA recently revealed that it will look more closely at advisers who recommend higher-risk products, such as unregulated investments.  

The FCA will require firms to report data in their Retail Mediation Activities Return on the distribution of products that fall within a new category called “enhanced reporting investment”, consisting of investments that are subject to restrictions on retail distribution with a view to the introduction of risk-based levies for higher-risk investment products.

As this latest paper was published, the FCA’s director of policy, David Geale, suggested that although there are plans to have providers share more of the cost of funding the FSCS, additional supervisory work could reduce the financial burden overall. Indeed the consultation paper lists among its preferred outcomes: “Reflecting conduct risk where appropriate, in particular unsuitable advice on high-risk investments.” 

While in its December paper, the FCA considered the introduction of mandatory terms for PII, such as requirements to have run off cover, the FCA has now confirmed that it will take no action after finding that over the past decade, of all claims submitted, 78 per cent by value were paid by a combination of PII and the excess; and that any reduction in FSCS levies for advice firms was likely to be outweighed by increases in PII premiums.

The FCA intends to proceed with the following proposals, which were consulted on in CP16/42 (most of these rules come into effect on 1 April 2018, although certain provisions come into effect on 30 October 2017 and 3 January 2018):

• The introduction of a new debt management claims class for claims about the loss of money relating to the activities of debt counselling and debt adjusting carried out as part of an individual entering into a debt solution to discharge their debts. 
• The extension of FSCS protection to the intermediation of structured deposits.
• The introduction of "look through" rules for collective investment schemes (CISs) so that, in certain circumstances, the FSCS can treat participants in the relevant fund as having a claim, instead of the CIS, operator, trustee, manager or depositary who is the actual claimant.
• The inclusion of the Society of Lloyd's in the retail pool.
• Amendments to the FSCS funding arrangements to remove the rule relating to paying FSCS levies by quarterly direct debit payments, and to require firms that already pay FCA and PRA levies on account to also pay FSCS levies on account.

The FCA has decided not to extend FSCS protection to cover negligent advice provided by debt management firms.  

The FCA set itself an invidious challenge in seeking to both reduce the volatility of FSCS levies and to align levies better with the risk profiles of firms. While the FCA's proposals might meet the former objective and will be welcomed by many advisers who might see reduced levies, the latter objective remains a work in progress. We can expect the FCA to revisit this issue in due course.  

The deadline for responses to CP17/36, including comments on the items for discussion, is 30 January 2018. The FCA expects to publish a policy statement in the first half of 2018 that will contain responses to the feedback received to the issues consulted on in CP17/37 and final rules. It will make these rules in time for implementation in the 2019/20 financial year.

Neville Cotton is compliance director and Brian McDonnell is a partner, financial regulatory team for Addleshaw Goddard