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Will a risk-based FSCS levy become reality?

Will a risk-based FSCS levy become reality?

A risk-based levy for the Financial Services Compensation Scheme is attractive but probably not practically achievable, according to the latest FTAdviser Podcast.

The Financial Conduct Authority is currently consulting on a discussion paper into how it can reform the compensation framework in financial services.

As part of this it is looking again into whether a risk-based levy for the FSCS is feasible.

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But Tim Fassam, director of government relations and policy at adviser trade body Pimfa, said that while the idea was attractive, it faced practical difficulties.

He said: "We would all like to see a scenario where the organisations that are likely to call on the levy pay more and contribute more to it [...] however it is quite tricky to apply in practice.

"The way we are regulated in the UK, we tend to regulate services rather than products so any risk-based levy that tries to look at high-risk products, when there are claims for compensation that fall onto the FSCS it is usually because those products have been sold with advice. The compensation is on the advice not on the product so it becomes quite difficult to target.

"The other factor is that on a number of firms that are falling on the FSCS, they are caught by this exact model but they don't have advice permissions. They are found to have given advice even though they were claiming it was an execution-only sale and that means they would never be caught by a risk-based levy because you would have to be charging them for the risk that they may do something which they don't have permission to do. And if they were going to do something they don't have permission to do there should be much stronger regulatory interventions."

Fassam said a more achievable solution would be to use fines gathered by the FCA towards funding the FSCS.

He pointed to the fact that the fines levied during 2021 would cover 80 per cent of the cost of the FSCS levy.

The overall FSCS levy has increased in nominal terms from less than £300m in 2011-12 to an expected levy of £717m in 2021-22.

The FCA has accepted this situation needs to be addressed and it has admitted the burden of the levy has fallen on firms which have done nothing to bring about these liabilities.

As part of its discussion paper, it has raised the prospect of introducing a series of measures, including a more stringent appointed representative regime, reforms to prudential rules and limitations on high-net worth individuals claiming compensation.

Claudia Clay, risk and regulatory director at The Private Office, said this last proposal would be harder for savers to understand when advisers explain how the FSCS works.

She said: "Poor advice is a risk regardless of your worth. You can be wealthy and vulnerable to poor outcomes. I can't imagine we would treat a client who had more wealth any less favourably than a client who didn't and I find it very strange that's a concept they are entertaining.