The former head of retail investment policy at the Financial Services Authority has criticised its successor the Financial Conduct Authority's plans to reform the industry-paid for compensation scheme.
David Severn, who was also the director general of the Association of Independent Financial Advisers, said the FCA's two ideas for reducing the size of the bill for the Financial Services Compensation Scheme was "wholly inadequate".
In October the FCA published proposals to force advisers to put money aside for the benefit of the FSCS.
This would involve either requiring firms with professional indemnity (PI) insurance exclusions to hold an amount of capital in trust for the benefit of the FSCS or requiring firms to take out a surety bond to cover claims in the event of their failure.
But Mr Severn, now a consultant, said the FCA had failed to address key questions, such as how the amounts would be calculated, how it would stop the additional cost from being passed on to consumers through higher charges, and whether there was capacity in the surety market to handle the increase in demand.
He said: "It is a pity that in both cases the policy analysis which one would have expected to see is entirely lacking.
"In the absence of detail on either of these proposals it is impossible to give a sensible response as to whether either option would be feasible, sensible and helpful."
Mr Severn also criticised the FCA's attitude to the PI insurance market more generally, saying the regulator had been "meek" in its dealings with providers.
Advisers must have PI cover to trade. The FCA's minimum limits for firms are €1,120,200 for a single claim and €1,680,300 in aggregate.
However PI providers often have significant excesses included in adviser policies of around £10,000 which firms must pay before their insurance kicks in. In the case of multiple claims paying these excesses can wipe out an advice firm and send claims to the FSCS before a PI policy is triggered.
Mr Severn said: "My suggestion is that the FCA looks at whether there are ways of challenging the stranglehold which the PI insurers currently have.
"Specifically, I suggest the FCA look at the feasibility of a mutual to provide PI cover. In New Zealand there is a mutual called Riskpool which was set up specifically because of the vulnerable position in which individual local authorities found themselves when trying to negotiate with PI insurers.
"In the UK there is the Griffin Insurance Association, formed by Lloyds brokers because of their concerns over the availability and price of insurance."
One of the proposals the FCA is investigating is a risk-based levy, which it is currently carrying out research towards by gathering data through Gabriel returns.
It will mean that when advisers complete their Retail Mediation Activities Return, they will be asked whether they offer, recommend or sell any non-mainstream pooled investments, non-readily realisable securities, contingent convertible instruments, CoCo funds or any mutual society shares.
If the answer to any of these is ‘yes’ then advisers will be asked to provide how much of their annual eligible income comes from this business.
Mr Severn said the regulator which preceded the FCA said it would look into this in 1997 and he said there had been an "unacceptable delay" on this issue.
damian.fantato@ft.com
