It's not right the FSCS levy is giving chief execs sleepless nights 

The outbreak of the pandemic and subsequent lockdown has meant that we have all had to learn to live and work in new ways.

Having grown accustomed to working from home and having proven they can be just as effective as in the office, it’s hardly surprising that a majority of people want to keep flexible working practices when life finally returns to normal.  

Time will tell whether such flexible working practices do survive but it seems unlikely that chief executives will be able to resist such change even if they wanted to.

Most don’t, if PIMFA’s most recent business forum survey is to be believed. In fact, returning to the office didn’t feature in their top five concerns, while it is an area of focus for 2021.

In terms of operational resilience, while the last year has proved challenging, by and large firms have done well and remained resilient throughout the pandemic.

Overall, they have been able to predict their costs and budget for them, make changes where necessary and keep operating.

But what does keep chief executives awake at night is the size of the Financial Services Compensation Scheme (FSCS) levy and what their firm’s contribution will be. 

Many firms have spent considerable time and effort maintaining their operational resilience over such tumultuous times and the news that the FSCS budget was likely to increase by 48 per cent this year was shocking for many firms and was unsurprisingly met with consternation and frustration. 

Unpredictable costs

At PIMFA’s recent Virtual Fest 2, the point was made by the chief executives of several of our member firms - including Sarah Soar, chief executive of Hawksmoor Investment Management, Peter Moores, chief executive of Raymond James and Martin Andrew chief executive of Close Brothers Asset Management - that, while the FSCS levy is “the cost of doing business in a regulated sector of the market” that is only half of the problem.

The other half is that it is utterly unpredictable. 

Business leaders accept there are costs to their operations, of course they do.

What does keep chief executives awake at night is the size of the Financial Services Compensation Scheme (FSCS) levy and what their firm’s contribution will be. 

And they accept the FSCS is important for maintaining consumer trust and as such the levy is one of those costs.

What becomes unacceptable is the fact that over the last few years the levy has consistently and significantly increased and continues to be unpredictable.

The result is that it makes it, at best, extremely difficult to plan and budget for and, at worse, presents firms with an existential crisis: one that is driving consolidation and hampering innovation and investment.

That the size of the levy is unsustainable is beyond contestation. The FSCS itself agrees it is unsustainable, so too does the Financial Conduct Authority (FCA).

HM Treasury also admits it is high, even if City Minister John Glen, rightly made the argument – at Virtual Fest 2 - that the existence of the FSCS gave consumers greater confidence to invest and save. 

Everyone in the industry recognises that the FSCS plays a vital role in UK retail financial services. But it is hard to think of another industry that is forced to accept unpredictable costs to their business on quite the same scale. 

Price hikes unacceptable 

Moreover, one of the arguments advanced in defence of the levy: that increases to it were comparable to rising car insurance premiums, doesn’t hold water.

Very few of us would accept a 48 per cent hike to our annual car insurance premium, we’d simply go to another insurance provider.

Everyone in the industry recognises that the FSCS plays a vital role in UK retail financial services.

In the case of the FSCS levy, firms can’t, leading to resentment among the ‘good guys’ who find themselves having to pay for the ‘bad guys’. 

Meanwhile, smaller firms are finding it increasingly hard to secure professional indemnity insurance that covers all their activities.

As we have argued before, all of this means firms removing services they can’t get insurance for, and hikes to the cost of advice, making it available to fewer consumers.

This is not something anyone wants; including the FCA as outlined in their call for input on Consumer investments.

We urgently need action from the FCA and HM Treasury.

PIMFA put forward a relatively simple solution at the end of last year: that a portion of FCA fines goes towards subsidising the levy at least in the short term until a better solution can be found.

As a gesture of goodwill, that would soften the blow a little. 

We have also created a roadmap to better outcomes and appreciate a longer-term solution will take time to arrive at.

But, in the meantime, if the government and regulator want our sector to remain one that thrives, is competitive and continues to innovate, then they must engage proactively on this critical issue. 

Liz Field is chief executive of PIMFA