FCA told to rethink FSCS funding review

The professional body has called for a joint solution to the flaws in the Financial Services Compensation Scheme (FSCS) and professional indemnity insurance (PII) market as part of its submission to a Financial Conduct Authority consultation.

In its response to the regulator’s consultation, Reviewing the funding of the Financial Services Compensation Scheme (FSCS), the professional body welcomed the FCA’s proposed review of the professional indemnity insurance market later this year.

But the Personal Finance Society suggested it should be more closely integrated with the current review into FSCS funding.

The PFS is concerned proposals to reform the FSCS, due to be published by the FCA in Autumn 2017, will fail to take into account the outcomes of the later professional indemnity insurance review.

FSCS levies – used to pay the compensation bill – are split so the part of the industry generating claims pays for picking up the tab for providers and advice firms that have gone bust.

Life and pensions, mortgage, and investment advisers combined face paying £270m to the FSCS for 2017 to 2018.

The indicative levy for 2017 to 2018 for life and pensions advisers alone will be £171m - a £45m increase on the current year.

Any success the FSCS review achieves in terms of reducing the unpredictability of levies, and better aligning costs to the risk profiles of adviser and related firms, could be undermined if it results in less competition and higher premiums in the PII market.Keith Richards

Claims from the life and pensions class are expected to exceed the class's annual threshold, meaning the FSCS may have to call on spare funds from the retail pool which all levypayers contribute to.

Keith Richards, chief executive of the PFS, said the disconnected approach between the FSCS funding review and the FCA’s examination of professional indemnity insurance requirements was likely to lead to a “sub-optimal outcome.”

Mr Richards said: “Given the link between professional indemnity insurance and the FSCS, and the dynamics of how insurance works in relation to the legacy liability of regulated advice, we need to find an integrated and sustainable solution that responds to the flaws in both markets.”

“Any success the FSCS review achieves in terms of reducing the unpredictability of levies, and better aligning costs to the risk profiles of adviser and related firms, could be undermined if it results in less competition and higher premiums in the PII market.

“Higher risk rated advice firms may even find it impossible to secure PII as a consequence, potentially forcing them into administration and thereby adding more liability into the FSCS.”

The PFS has previously proposed the idea of a single solution, creating a central fund with the financial capacity to protect both firms and consumers from advice firm failures.

A single contribution to a non-commercial ‘pooled risk’ fund, with an excess applying similar to professional indemnity insurance, is likely to cost less and be more efficient than the current dual cost system, according to the PFS.

Mr Richards said the idea of a single contribution was an example of the type of “out of the box” thinking that needed to be considered as part of the broadest possible review of professional indemnity insurance and the FSCS.

The FCA and FSCS failed to respond to a request for comment on whether the compensation scheme funding review would take into account any changes to professional indemnity insurance requirements.

Garry Heath, director general of adviser trade body Libertatum, said he completely agreed with the Personal Finance Society that funding of the compensation scheme and professional indemnity insurance should be considered jointly.

He further added that the regulator needs to think about the “boil on the bottom” that is causing all the problems with the FSCS levy and professional indemnity insurance – the way the Financial Ombudsman Service operates.

emma.hughes@ft.com