The chairman of the City watchdog has warned the already "unacceptable" Financial Services Compensation Scheme levy is likely to increase as a result of the coronavirus crisis.
Echoing what many advisers have said for a long time Charles Randell, chairman of the Financial Conduct Authority, said the system needed to be redesigned so "polluting firms" in the financial sector paid the bill for high risk and unsuitable investments, not "well-run firms" via the compensation scheme.
In a speech to be delivered at a UK Finance roundtable today (June 16) the watchdog boss warned all too often the cost of "bad behaviour by firms which then fail" was mutualised through the FSCS, and that the coronavirus crisis had "reinforced" his concerns.
He added: "People will keep searching for higher rates and, if things stay as they are, some may keep falling for promises that are too good to be true.
"Coronavirus has shown that high risk investments are exactly that. All too often we hear that it is the people who were least suited to invest in them who have been lured in by an illusion of security, pinned their hopes on unrealistic promises and lost all their savings.
"We are already seeing speculative leveraged property investments failing. Investors in higher risk assets who hold them through unlisted structures face additional perils: the absence of normal market discipline, the illiquidity of their investments, and in some cases their low position in the capital structure and the highly concentrated nature of the risks.
"The FSCS compensation costs levy is already at an unacceptable level; and I am sorry to say that it is likely to increase, as some firms will fail during this crisis."
But Mr Randell warned changes to reduce the cost of regulation would require significant investment and take a number of years to implement.
He added: "We can do some of this through our existing rule-making powers, but I believe there may need to be changes in our regulatory perimeter: in particular changes which restrict the availability of high risk products to ordinary retail consumers."
Mr Randell also said capital requirements and professional indemnity insurance for firms needed to be "proportionate to the risks they present to consumers".
The FSCS levy to be shouldered by advisers in the coming year has increased by £16m to £229m, predominately as a result of an extra £44m set aside by the lifeboat body to meet claims for misleading advice against the collapsed mini-bond provider London Capital & Finance.
The FCA chairman also said more needed to be done to stop social media platforms and search engines promoting unsuitable investments and scams to consumers, branding it "frankly absurd" the regulator was having to pay hundreds of thousands of pounds to Google to warn against these type of adverts.
Earlier this year FTAdviser revealed the FCA had spent almost £90,000 in the first two months of this year in its fight against fraudulent and misleading online adverts for financial services.