Firms will soon start to see their invoices coming through from the FCA reflecting this year’s fees for the FCA, the Financial Ombudsman Service and the Financial Services Compensation Scheme (FSCS). 

    For years, the most contentious area has been the amount that firms pay towards the FSCS.

    The FCA first looked at this issue in a consultation paper in December 2016, where it examined trying to reduce the size of the compensation bill whilst maintaining the integrity of the scheme and consumer protections. It continued this investigation in a further consulation paper last year.

    A further consultation was published in May, and this starts to provide some clarity on the changes that will be made. What with the impact of MiFID II and the run-up to the General Data Protection Regulation, this paper may have gone unnoticed.

    So far, the following changes are due to be made on 1 April 2019:

    • Merge the investment intermediation and life and pension intermediation classes. The aim is to reduce volatility as the total bill will be shared across a broader range of firms.
    • Income received from pure protection contracts will be placed into the general insurance distribution funding class.
    • Product providers will contribute 25 per cent of the adviser bill
    • The maximum amount of compensation for investment and mortgage advice will increase from £50,000 to £85,000.

    So for personal investment firms, there are some positives and negatives. It is acknowledged that the increase in the amount of compensation that could be paid will impact the FSCS bill, but the proposal to make this increase was largely supported by those who responded to the earlier papers.

    The FCA has also previously looked at the role that professional indemnity insurance (PII) has in reducing the FSCS bill. Some PII policies have excluded the FSCS as a claimant or exclude claims where the firm, provider or fund becomes insolvent.

    In the latest paper, the regulator proposes to introduce a rule to make sure firms do not have PI cover which excludes claims relating to the policyholder or a third party becoming insolvent. This would be effective from when a PI plan is renewed or taken out once this proposed rule takes effect, which could be 1 April in line with the other changes due to be introduced. 

    The FCA have conducted a cost benefit exercise on this by speaking to 15 large PI insurers active in the market. Of the 15 providers, six said they either did not have these exclusions in place, or didn't think there would be a premium increase (or couldn't provide an estimate). 

    One provider estimated an increase of 25 per cent in the premium. A total of seven providers suggested they would exit the market but the FCA felt these providers accounted for a small proportion of the market so this would have a limited impact. 

    The FCA then looked at the sensitivity of firms' profits based on an increase of 25 per cent in PII premiums. Their analysis suggested only an additional 1 per cent of the firms in the review would have made a loss in the last three years. The FCA acknowledges these increased costs are likely to be passed onto consumers. 

    As a result of this proposal, consumers are more likely to receive the full amount of their losses and there will be less burden on the FSCS, meaning that levies are less likely to increase substantially. The FCA are requesting responses to this proposal.

    From 1 April 2018, the FCA collects data via section J of the Gabriel return on high risk investments. The purpose of this data is to develop risk based levies rather than making firms hold a surety bond or holding monies in trust. This will be further consulted on next year.

    In summary, the FCA cannot be accused of not listening to personal investment firms when they expressed their dismay at the ever increasing FSCS levies being imposed on firms. It is taking time though, and there are still questions around what impact these changes will have on the PI market, firms' PII costs, levies and overall FSCS costs.

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