Advisers warn FSCS levy adds to 'extreme pressure'

twitter-iconfacebook-iconlinkedin-iconmail-iconprint-icon
Search supported by
Advisers warn FSCS levy adds to 'extreme pressure'

Yesterday (May 21) the lifeboat body announced the levy to be shouldered by advisers in the coming year had increased by £16m to £229m, predominately as a result of an extra £44m set aside to meet claims for misleading advice against the collapsed mini-bond provider London Capital & Finance. 

But the increase has been met with criticism by advisers, who have warned the growing cost could exasperate the financial challenges faced by the industry. 

Ian Lowes, managing director at Lowes Financial Management, said: "I’ve been in the sector far too long to get wound up by such things as the FSCS levy, but that’s not to say it doesn’t frustrate me deeply.

"Time and time again, the cost of failures and crooked activity end up being paid for by those who do things right."

He added: "No self-respecting intermediary would have recommended London Capital & Finance and as a non-regulated investment it should never have been covered by the FSCS and yet here we are paying the bill, with no recourse against anyone – because someone else has final say that we pay."

Mr Lowes warned the increased levy, in addition to the growing cost of professional indemnity insurance and the already challenging economic landscape of 2020, could place some advice firms under "extreme pressure". 

The FSCS bill for the entire financial services industry has increased from initial predictions of £635m to £649m for the 2020/21 year, but cost savings have been made elsewhere, meaning advisers have seen their levy increase by £16m to £229m. 

Time and time again, the cost of failures and crooked activity end up being paid for by those who do things rightIan Lowes

Ricky Chan, director at IFS Wealth & Pensions, said the levy hike was disappointing but "unfortunately all too common to see".

Mr Chan said: "As many advisers are doing their best to look after their clients, especially amidst the backdrop of the Covid-19 pandemic affecting businesses and individuals alike, we’re seeing rising costs in the form of FSCS levies and FCA fees, together with rising professional indemnity insurances costs.

"It’s certainly adding more pressure on small firms and indeed the latest rise in FSCS levy could be the final straw for some."

Mr Chan said the fees rise showed FCA regulation and supervision were failing and the ever increasing FSCS levies were unsustainable, so reform was needed.

He added: "It’s also pretty shocking to see FSCS pay out for unregulated investments by London Capital & Finance, which, to my understanding, did not even have advice permissions."

Read more about Mr Chan's view on reform in our piece on pension scams: Broken system - Why financial services regulation needs reform

Before it entered administration in January last year LCF raised in excess of £237m from more than 11,500 investors over the course of two years, and it has been embroiled in a scandal since.

Keith Richards, chief executive of the Personal Finance Society, said whilst advisers were supporting clients amid the current crisis it was "frustrating" for the industry to receive an "additional call for cash to fund the FSCS during these unprecedented times".

The professional body boss said: "The current method of funding consumer compensation is unsustainable, which is why the PFS is currently pushing for the Financial Conduct Authority and HM Treasury to relieve the pressure on advisers seeking professional indemnity insurance in the midst of the coronavirus pandemic."

Mr Richards added: "Ultimately what we want to see is long-term reform of the FSCS levy and the professional indemnity insurance market.

"We have proposed a workable alternative way of funding consumer compensation and will continue to engage with the regulator and government about reducing financial uncertainty for advice businesses who want to focus on helping clients achieve financial security."

In response to the levy hike the PFS renewed its call for a four-month grace period for advisers whose professional indemnity insurance falls due for renewal during the coronavirus lockdown. 

Simon Harrington, senior policy adviser at the Personal Investment Management & Financial Advice Association, said the trade body remained supportive of the FSCS and its role in "providing consumers with confidence in making investment decisions".

But Mr Harrington warned Pimfa "retained long standing concerns" about the affordability and calculation of the levy.

Rising compensation costs attributable to firm failure suggests we may want to look again at the effectiveness of the current supervisory regimeSimon Harrington

He said: "We have previously raised this concern, as well as others regarding the effectiveness and level of accountability within the FCA, both in terms of its supervisory approach and the practical outcomes of that approach. 

"In the context of the current crisis, increased regulatory costs placed on smaller, prudent businesses, in particular, could cause operational issues in the short to medium term."

Mr Harrington said the FCA’s payment extension for regulatory fees from 30 to 90 days would help, but "long standing issues still remain".

He added: "Rising compensation costs attributable to firm failure suggests we may want to look again at the effectiveness of the current supervisory regime.

"This is why we have called fo a wider debate about the future of regulation in the UK that goes beyond the content of the rulebook.

"London Capital & Finance provides a useful case study given that concerns had been raised about them long before its failure, but the FCA only banned the mass marketing of speculative mini bonds to retail customers in November last year."

The funding mechanism of the FSCS underwent a review in 2018 when it was decided product providers should contribute more towards the funding of the FSCS.

But calls for reform became louder again earlier this year after several advisers wrote to their to MPs asking them to lobby the government for further reform. But so far this has fallen on deaf ears.

Meanwhile in today's update the FSCS said whilst it was continuing to see the impact of pension mis-selling and an increase in pension related claims, it had reduced its initial forecast for self-invested personal pension operator claims by £7m.

The lifeboat body said this was due to a revision in the anticipated timing and cost of some recent and expected future Sipp operator failures.

rachel.mortimer@ft.com 

What do you think about the issues raised by this story? Email us on fa.letters@ft.com to let us know.