The regulator’s proposals for reforming the Financial Services Compensation Scheme (FSCS) have led to some warning the hoped for radical overhaul amounts to little more than a redistribution of cost for advisers, and fears already hard to come by business insurance will dry up or become much more expensive.
This morning (1 May) the regulator published its final rules on FSCS funding, following months of consultation.
It confirmed it would implement its previous proposals - including forcing product providers to contribute about 25 per cent of the compensation costs that fall on advisers.
It will also merge the life and pensions and investment intermediation funding classes, and carve mortgage advisers out to the general insurance distribution class.
But the regulator has also opened a consultation on a new proposal, which aims to force advisers' professional indemnity (PI) insurers to cover some of the cost of compensation by allowing the body to claim against a defaulted firm’s insurance.
Some advisers think this could push more insurers out of the market or hike the price of premiums.
Steven Farrall from Williams Farrall Woodward Financial Planning said: “It will fail. You cannot ‘force’ the PI insurers to do anything. They will simply exit the market.”
Alistair Cunningham, financial planning director at Wingate Financial Planning, also thought insurers might vote with their feet.
“Anecdotally PII is already getting harder to obtain, no doubt in a significant part due to the final salary pension transfer issues,” he said.
Only on Tuesday the FSCS confirmed DB transfer claims had pushed the adviser levy for the coming year up £52m.
Alan Chan, director at IFS Wealth & Pensions, warned the regulator would need to be wary of “spooking PI insurers” into exiting but said the measure would ultimately be for the greater good.
He said: “Relatively speaking, it should mean lower cost to the advisers in the longer term. PI insurers are notorious for their exclusion clauses and the FCA is aware that for some firms their PI cover is not worth the paper it's written on because of the terms.
“This has to be addressed by having standard minimum term of cover set by the FCA.”
Providers, meanwhile pointed to a ‘redistribution of cost’ in the FCA’s provider-pay proposal.
Hugh Savill, director of regulation at the Association of British Insurers, said: “[The measure] does not reflect the realities of adviser failure and does not ensure that those responsible are the ones who pay.”
He said the FCA should focus instead on ensuring fewer advisers fail so the cost on the FSCS is “reduced rather than simply redistributed”.
But Aegon said it “warmly welcomed” the move. Steven Cameron, pensions director at the firm, said: “Unlike other providers Aegon has been calling for this, partly to reflect the benefit all players in our industry receive from the confidence the FSCS provides to consumers using the industry’s products and services.”
The FCA is also thinking to reopen the debate on risk-based levies. As revealed today, it has started to collect data on sales of high-risk investment products from 1 April, with a view to developing the levy.