Estimated reading time: 5 minutes
Earlier this year, I wrote a blog about the interim Financial Services Compensation Scheme (FSCS) levy. I talked about the demands that advisers were receiving, leading to a letter writing campaign to Members of Parliament (MPs), calling for an urgent reform of the funding method that underpins the FSCS levy.
In essence, the ‘good guys’ were paying for the nefarious activities of the ‘bad guys.’
Six months later, here we are again. To quote a phrase: “It’s like déjà vu – all over again.” Advisers have been receiving their annual regulatory bills from the Financial Conduct Authority (FCA). These bills include the FCA’s own fees, as well as contributions to the FSCS levy, the Financial Ombudsman Service (FOS) and the Money and Pensions Service (MaPS).
The impact on financial advisers
What has made the headlines this time round is the exponential growth in these bills over the past couple of years.
In one typical example, a five-adviser business saw its total regulatory bill increase by nearly 165% between 2018 and 2020. In addition, its professional indemnity premium leapt by 52% compared with last year’s premium, despite having no complaints made against it to the FOS during the past five years. Clearly, increases of this magnitude are unsustainable, particularly where the FSCS levy accounts for the bulk of the bill.
"Clearly, increases of this magnitude are unsustainable, particularly where the FSCS levy accounts for the bulk of the bill."
Not only does this increase the risk of well-run adviser firms being forced out of business, potentially leaving their former clients unadvised during a pandemic and arguably more vulnerable to scams. But other firms who decide to continue are being forced to increase their client fees, in order to help balance the books.
Advisers are fighting their corner
In the face of such adversity, advisers have joined forces to mount another letter writing campaign to their local MPs, as well as to members of the Treasury Select Committee (TSC). The aim is to put pressure on both HM Treasury and the FCA to restructure the current means of imposing costs on the advisory profession.
Allied to this, a group called “Financial Planners United” has been established on LinkedIn, with the stated purpose of, “…unifying the profession to provide a voice to the smaller firms that are unrepresented and facing often unfair challenges.*”
The first of those challenges is tackling the restructuring of the FSCS levy.
What would constitute the optimum fee structure for the FSCS levy? Options put forward to MPs include “the polluter pays.” This is where higher financial penalties are imposed on the perpetrators of bad advice, a product levy. So providers add an element of regulatory costs into their product’s charging structure, a levy on managed retail assets and the market, and a ‘regulatory dividend’ is received by those advisers who have never had a complaint against them upheld.
A recent adviser poll put these four options to the vote. The result? Nearly half of respondents selected “polluter pays.” The desire for the ‘bad guys’ to foot a significant proportion of the levy costs remains undimmed.
A lack of funding accountability
Several constituency MPs, on receipt of advisers’ letters, have asked the Treasury to conduct an urgent review into the way that the FCA and the FSCS are currently funded.
My aforementioned blog set out how quick Treasury representatives were to ‘pass the hot brick of accountability”’ from Parliament to the regulator, stating that the government has no role in setting the FSCS levy, because the FSCS is not a governmental body and so the levy is not a government issue.
Instead, the FSCS, “…carries out its compensation function within rules set by the FCA and Prudential Regulation Authority, who are independent from government.”
Yet former FCA employee, Rory Percival, highlighted a “misunderstanding” between the various parties at the time, stating that “…the FCA decides which sector pays what to FSCS. The government decides whether FSCS is paid for by financial services firms or by other means such as product levy, fines, or taxation.” Given this clarification, would these newer, more unified calls for levy reform, be greeted with open arms?
"Given this clarification, would these newer, more unified calls for levy reform, be greeted with open arms?"
Sadly not. A spokesperson for the Treasury replied that it, “…works closely with the FCA to ensure the market for financial advice works well. However, the FCA operates independently within the statutory framework agreed by Parliament and is responsible for setting the regulatory fees on industry.”
Hopeful signs? The FCA calls for input
Although it would seem that we are no further forward in instigating a levy review, are ‘green shoots of common sense’ starting to sprout at the FCA?
On 15 September, the FCA launched a Call for Input (CFI) to, “…help shape its work on improving the consumer investment market”.
Within a number of listed “key questions” was the following;
“What more can [the FCA] do to ensure that, when people lose money because of an act or omission of a regulated firm, they are appropriately compensated and that it is paid for fairly by those who cause the loss?”
In other words, there is an implicit acknowledgement of the concept of “polluter pays” and a willingness to seek ideas from the industry as to how that ideal could be achieved. This brings with it a hopeful consequence of fairer regulatory fees and the much desired outcome of the ‘bad guys’ paying a greater share of future levy costs, instead of the ‘good guys’.
". . . there is an implicit acknowledgement of the concept of “polluter pays” and a willingness to seek ideas from the industry as to how that ideal could be achieved."
It is therefore incumbent on us all to push at this apparently unlocked door, working with the regulator to achieve this levy reforming goal.
If you would like to talk about this topic or have any questions in general, please get in touch with your usual Barnett Waddingham contact to find out how we can assist you. Alternatively, please contact me below.
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