Estimated reading time: 3 minutes
A Financial Conduct Authority (FCA) consultation, which closed on 31 January 2018, proposed expanding the pool from which the Financial Services Compensation Scheme (FSCS) draws the funds it uses to pay compensation. More specifically, it proposed that 25% of the levy on financial advisers be paid by the providers of pension products. On 1 May we learned the result.
The FCA’s survey said … providers to pay!
I say providers but what I really mean is you, the SIPP members, pay. Providers don’t have a magic money tree any more than advisers do or the FSCS themselves. All that compensation has to come from somewhere. I’m afraid you are the magic money tree.
That’s why we argued against the proposal. It does nothing to tackle the underlying causes. We likened it to enlisting more people with more mops to tackle a growing spill rather than turning off the tap causing it.
Perhaps we shouldn’t have been too surprised or too disappointed. There are in fact numerous, related issues involved and there is no silver bullet to strike them all down at once.
Advisers have long been frustrated that it is the honest majority remaining in business who pay the levies while the predators slink away, only to resurface later and repeat their old tricks. Some advice groups leapt at the chance to share the pain, suggesting that 50% or even 75% of the advice levy be passed to providers. One particularly well-known consumer-champion journalist even suggested 100%. Deflecting the blame on to a different set of innocents only moves us further from tackling the roots.
"We have called for a comprehensive set of measures including a cold-calling ban, more policing to detect and prevent and for proceeds to be tracked down and used to compensate victims"
So what can be done?
Pre-funding the FSCS would mean that everyone had to stump up, up front. It would also allow levies to be risk-based, with higher levies on those doing riskier work that was more likely to go wrong. Sadly, there are serious flaws with this seemingly neat solution. The crooked hide their activities. They also form a small minority and therefore so would their contribution. Moving from retrospective funding to pre-funding would be punishingly expensive. And having a known, quantifiable pool could even end up encouraging fraudsters to compete for a share of it.
The professional indemnity (PI) market needs attention. Its poor functioning is a source of much frustration, not typically seen by consumers. Advice firms are obliged to have adequate PI insurance. However, it simply doesn’t always work out that way. Policies not unreasonably have exclusions but it is reported that some have been triggered excluding claims precisely when they were needed. Examples reported include advice firms acting outside their FCA permissions, giving advice that turns out to be uncompliant, losing their permissions or becoming insolvent. Of course, PI insurers don’t have a magic money tree either. Insurers have been leaving the market and advisers are finding it ever harder to get insurance at all.
The functioning of the FSCS itself should be examined, too. General Counsel for the FSCS recently conceded that some claimants who had received compensation from the FSCS may now receive compensation from certain SIPP providers. This could lead to the FSCS seeking to recoup the original compensation payments. Worse, many victims never claim at all whether out of shame or ignorance or both. Certainly the FSCS has a difficult job balancing the interests of those who may have been scammed against those who provide the funds but these situations are not satisfactory.
That is why we have called repeatedly for a comprehensive set of measures including a cold-calling ban, more policing to prevent fraud or detect it early and for the proceeds to be tracked down and used to compensate victims rather than going into the general coffers.
The funding consultation is water under the bridge. The decision has been taken. We are going to have to live with it.
Except that doesn’t have to mean we simply shut-up and pay up. If tapping a new, bigger pool of funds is a convenient way to ignore the underlying issues, reputable businesses and their clients will be victims, too.