The chief executive of the Financial Services Compensation Scheme has thrown further support behind the introduction of a risk-based levy to pay for the cost of industry failures.
In his latest blog on the sector, Mark Neale said a "significant porportion" of the cost of this year's levies to the FSCS were a result of bad advice to invest in illiquid and risky unregulated assets.
When a firm fails leaving claims for compensation against it, these are paid for by the FSCS, which in turn passes the cost onto the rest of the advice market, giving rise to complaints that good firms are unfairly forced to pay for the bad practices of rogue businesses.
Mr Neal said he was personally very pleased the FCA has committed to further work on risk-based levies, which would see a move towards a "polluter pays" model.
"It should not be beyond us to find a way of adjusting the levy to reflect the risks to which individual firms are exposing their customers and, hence, the potential compensation costs to which they are exposing the industry," he said.
The Financial Conduct Authority did not introduce a risk-based levy in its recent review of how the FSCS is funded, but it has asked advisers to provide more information in their Retail Mediation Activities Returns on the high-risk investments they recommend.
This would allow the FCA to build a more comprehensive understanding of the market and, if need be, introduce risk-based levies in the future.
Mr Neale said the FSCS would continue to "play its part" in the search for a fairer way of sharing the costs of the protection it provides.
He added: "The announcement of our levies is always a reminder of the costs of FSCS protection. But we should not lose sight of the benefits we bring or of the steps we take to manage and minimise those costs."
Among the action taken to mitigate the cost of the FSCS, Mr Neale cited the upcoming sale of a further tranche of the Bradford & Bingley mortgage book which would allow the scheme to pay off the final instalment of the £15.6bn it borrowed from HM Treasury during the financial crisis in 2008.
Mr Neale said: "That means FSCS will have cleared up the legacy of the 2008 failures.
"In the last year, we have also made substantial recoveries from PPI lenders and insolvent estates.
"Thanks to our recoveries, our levies are much lower than they would otherwise be."
He added that the FSCS worked closely with its "regulatory partners" to share intelligence which may help prevent future failure.
damian.fantato@ft.com
