Although advisers will be paying less this year towards the FSCS levy, the fight to fix the funding model is more important than ever as an FCA review could lead to reform.
Paying less is usually something that is celebrated no matter who you are. Advisers in particular are inundated with big bills they must hand over cash for in order to keep running their business. Being in the advisory market in this day and age is a very expensive business.
So, on the surface of things, you might think advisers could breathe a sigh of relief as the Financial Services Compensation Scheme (FSCS) levy is set to drop this year.
Earlier this week the FSCS announced its proposed levies for investment and pension advisers for 2016/17.
It is planning on billing investment advisers £108 million and pension advisers £80 million, lower than the £116 million and £100 million levies over 2015/16, excluding the interim levies that creep up at a later date.
However numbers can be misleading, and advisers by their very nature know not to only take in the headline figures, and rightly so, as if you just concentrate on the levy cost you are missing the whole point about the FSCS funding debate going on.
I think we can all agree that the way the FSCS is funded is inherently unfair as all regulated advice firms pay towards the levy, so this effectively means if an adviser gives bad advice, then goes out of business, the remaining ‘good’ advisers end up paying for the mistakes of the ‘bad’.
Over the past year advisers have ramped up their efforts to push for the FSCS funding to be fixed, and with a Financial Conduct Authority (FCA) review this year, the momentum needs to increase now more than ever.
Fixing the FSCS
Although the headline proposed levies are lower than last year, they are still eye-wateringly high because of the broken funding model.
Adrian Murphy, partner at Glasgow-based Murphy Wealth, believes advisers are paying for the Financial Conduct Authority’s (FCA) mistakes.
He voiced the view many advisers have that the current model could lead to many good advice firms that have never had a complaint to go out of business. This is because the staggering FSCS fees have no cap on them because it all depends on how many ‘bad’ advice firms go bust.
“The current model is grossly unfair. We’re paying not insignificant amounts to the FCA for regulation with FCA bills and then we’re paying for the regulator’s failings with the FSCS levy.
“The levy is lower, but it’s still too high as we did nothing to contribute to it. I don’t mind paying for effective regulation, but if we could have a better FCA to limit these levies that would be better. Currently there’s no reward for being good.”
The whole issue got too much for one adviser to bear. In September 2015 Paul Beasley, managing director of Hertfordshire-based Richmond House Group took his anger to the top and wrote to FCA chief executive Tracey McDermott after being hit with a whopping 320% increase to his FSCS levy.
Paul also set up a petition calling for a reduction in the bill that has gained over 1,220 signatures to date.
Surprisingly Tracey replied to Paul saying she understood advisers’ ‘frustrations’ that the good firms were paying for the bad.
This marked improvement in communication and understanding from the regulator to advisers on the FSCS levy could be a significant step towards change.
Encouragingly Paul remains defiant and is continuing to fight against the FSCS levy after hearing about the proposed charge for this year.
He said: “It is completely unfair that we have to pick up the tab for this.
“It demonstrates again the need for a completely different method of funding and a return to the principle of caveat emptor. Cost reductions are welcome but need to go much deeper.”
Another problem with the FSCS levy is that advisers feel they cannot truly budget for this bill as they may be hit with interim levies at any point of the year.
In the summer advisers will get a letter through the post from the FSCS telling them how much they need to pay towards the levy. But that is not the end of the matter as at any moment they may be subject to pay interim levies, when the FSCS believes even more complaints are likely to come through the door.
This is another unfair aspect of the way the FSCS is funded. Many advice firms find it extremely difficult to budget and pay the FSCS levy, never mind predicting or planning for an unknown amount of unknown levies at unknown costs. It is effectively asking advisers to write blank cheques.
Nick Lincoln, managing director of Hertfordshire-based Values to Vision Financial Planning, said trying to figure out how much to pay was like asking how long a piece of rope was.
“An obvious example was last year when pension advisers got a £100 million levy but then had a £20 million interim levy as well.
“You get the headline figure, and you might not like it, but you think “fine…” but then you have all the additional levies that you don’t know what they are or when they will come.
“It’s even worse when you don’t know how many advisers are left out there. You look at the headline figure but you don’t know until the levy is confirmed how much of it you will actually pay yourself.
“It is intensely frustrating as an adviser that has never had a complaint, let alone gone for Ucis or holiday rentals in Sipps…
“I want the FCA to review the current model because it’s not fair that the good guys fund the bad. I welcome the review but I don’t think it’ll be an easy fix.”
Mind the gap
The FCA has committed to reviewing the FSCS and its funding this year, and it will form a crucial part to the Financial Advice Market Review with the Treasury.
The FAMR will focus on the advice gap, which advisers have argued has come about, in part, due to the cost of regulation.
Chris Daems, director of Essex-based Cervello Financial Planning, said that the costly FSCS levies make running businesses harder.
“Whilst the FSCS levies are slightly lower than last year the costs still make running a regulated financial planning practice more expensive than it potentially could or arguably should be.
“Our submission to FAMR talked about how these costs whilst not the only factor was certainly a contributory factor.”
Tim Page, director of Suffolk-based Page Russell, said: “The irony in all of this is we’re becoming more risk adverse, and then the FCA wonders why we’re not giving advice to all and sundry.”
So it’s a new year, but it’s the same old same old from the FSCS. Although advisers are united in their anger towards the FSCS levy, they are divided on the right and fair solution.
Many ideas including product levies, stronger professional indemnity insurance or even getting other sub-classes to pay out more have been mulled over with both their pros and cons debated and so far there does not seem to be a clear winning alternative.
How would you fix the FSCS? What would your ideal (realistic) funding model be?
We wait with bated breath the results of the FCA review, let’s hope 2016 is a defining year for advisers and sees a significant reform of the FSCS.