The chief executive of the Financial Services Compensation Scheme (FSCS) has backed the idea of introducing a risk-based levy.
Mark Neale has said penalising firms that sell high risk products was the “most promising” option in the scheme's pursuit of a fairer levy system for advisers.
This could be done by the regulator gathering information from advisers about higher risk investment sales.
The Financial Conduct Authority had already said it intends to start gathering such information to help it decide whether a risk-based levy would work.
The regulator published its long-awaited consultation on funding earlier this month, saying it was exploring a number of options, including making providers contribute from the first pound, widening professional indemnity insurance cover and exploring options of linking the levy to risk.
But it had ruled out a so-called product levy beforehand, where riskier products would attract a form of surcharge to offset the risk they posed to the system.
Mr Neale dismissed the idea of tinkering with firms’ professional indemnity insurance stating the fund had concluded the current arrangement was already “catching much of the harm before it reaches the FSCS”.
Besides, the measure would come at a cost, he cautioned.
Mr Neale said: “More promising is targeting the levies themselves on the harm we want to reduce - making the polluter pay, in other words, by taxing the pollution itself.
“The FCA paper, rightly in my view, opens the way for further work on risk-based levies which would do exactly that.”
He said higher risk investment products in retirement were the products that have generated a significant proportion of FSCS’ compensation payments in recent years, running into the “hundreds of millions of pounds”.
He said: “I do think these high risk and illiquid investments are rarely appropriate for the people to whom they have been recommended. If a fair means can be devised, it makes every sense to raise our levies on firms which trade in these products and run the resulting risk.”
Mr Neale said the FCA's paper was the best review of FSCS funding in his time as chief executive - he is currently in his third period.
He also backed the review’s proposals to raise the compensation ceiling for investment products to £85,000 in line with deposits.
This was because more people were investing their savings to generate a retirement income following the pension freedom reforms, he said.
“Those consumers need, in making those choices, to be able to understand how FSCS protection works and to have reasonable safeguards for savings which they will not be able to replace if lost,” Mr Neale said.
carmen.reichman@ft.com
