Industry experts and advisers have weighed in on the increasingly contentious funding strategy of the Financial Services Compensation Scheme (FSCS) as it currently stands.
The FSCS has been a source of frustration for many advisers who rebuke the scheme for being too costly and indirectly resulting in higher fees for clients.
Richard Freeman, chief distribution officer of Old Mutual said: “In any industry, effective business planning becomes really hard when firms operate under the shadow of unpredictable future costs.
“This is particularly true in the financial planning industry where the majority of financial advice firms are relatively small, local businesses. Many adviser firms face a difficult challenge absorbing significant ad-hoc costs, such as interim levies, without a knock-on impact in investment in other areas of their business.”
He added that the cost of meeting the levy can encroach on long-term expansion plans projects of adviser practices – be it hiring new staff or upgrading IT infrastructure.
The levy has notably inflated for life and pension advisers in recent history. The FSCS annual statement for the year ending 31 March 2016 revealed the charge for such intermediaries tripled to £119.4m compared to the previous year.
In its most recent Outlook report (published 1 December), the FSCS revised up the forecast for claims linked to life and pension to £136m for 2016 to 2017.
FSCS chief executive Mark Neale placed the blame on the increase in Sipp advice claims.
Darren Cooke, who is a one-man band chartered independent financial planner, at West Yorkshire-based Red Circle Financial Planning, said: “The issue is that there have been a small number of advisers who have, for whatever reason, recommended unregulated Sipp investments. The good guys who are doing the right things are left having to pay for the sins of others and crooks who just walk away from the industry. How can this be fair – I just don’t understand.”
Danny Cox, head of communications and chartered financial planner at Bristol-based Hargreaves Lansdown, said: “You have some advisers who offer advice on simple products but are paying the same levy pro-rata as another who advises higher risk and more complex products. That is clearly not right. We ourselves are risk averse.”
He added: “Because of the size of the business, we are going to pay considerably more than a smaller firm. We have no issues in making sure that investors are protected and we are looking forward to working with the FCA to come up with a better way of running the system so people pay proportionally.”
Stephen Jones, managing director of Derby-based Clear Solutions (Wealth & Tax Management), said: “The wider financial industry has evolved over time and the compensation scheme should evolve also, I think that times have moved on. There has been a significant reduction in the number of active advisers yet the remit of the compensation scheme is broader than it used to be.
“I think the scheme as it stands is completely inequitable but the sad thing is that it is the clients who ultimately suffer. After all, we are a business and have to pass on any additional costing pressures to them.”
Myron Jobson is a features writer for Financial Adviser
