I want to talk about the Financial Services Compensation Scheme (FSCS) levy.
I know I don’t pay it - instead I pay the Solicitors Regulation Authority (SRA) Compensation Fund levy - but I do work for clients who benefit from it.
I have a lot of conversations with the FSCS.
It may surprise you to know that I like the people there. They care and they want to do a good job, and that includes making sure monies are not paid out unless the claimant is entitled to it.
They have (politely) refused to pay my clients more when I have argued with them, and only agreed after attending questioning by me in Westminster before a number of MPs.
I can tell you on good authority, the FSCS does not pay out money for no good reason.
Nevertheless there will be more money to be paid out by the FSCS, a lot more.
My firm alone is acting against over 40 advice firms who advised steelworkers to transfer out of their defined benefit (DB) pension scheme. To our knowledge, only one of those has insurance to cover the DB transfer advice they gave.
In defence of these firms, they had insurance for that advice at the time they gave it.
Cover for this advice has since been withdrawn by their insurers and I have a lot of sympathy for the firms in finding themselves uninsured.
Without insurance it's very unlikely they will survive these claims, meaning many millions of pounds will be claimed from the FSCS.
My view is it is not the FSCS levy which is at fault, but the regulatory requirements for professional indemnity (PI) insurance which are the root cause of the problem.
As a solicitor, my regulator requires my firm to have insurance for all past business.
We are simply not allowed to have exclusions written into our PI policy which relate to advice we have given.
In fact, my firm has £60m worth of PI cover per claim if we need it.
I'm therefore safe in the knowledge that, if someone makes a mistake, we are covered (and we will also arrange additional and bespoke insurance where the client instruction needs it).
What this also means is that the SRA Compensation Fund can pay out compensation on a more generous basis and isn't a bone of contention for the legal profession.
Like the FSCS, the SRA Compensation Fund helps:
- to provide a safety net for risks that PI insurance is unable to cover;
- people who have suffered loss due to a solicitor’s personal dishonesty;
- people who have experienced hardship due to a solicitor's failure to account for money they’ve received; and
- reinforces the public’s trust in the legal profession.
Unlike the FSCS, the maximum compensation limit is £2m.
There are around 140,000 practicing solicitors in England and Wales in around 10,700 regulated firms. This is about twice the amount of financial advisers in the UK.
It's estimated that 4.8 per cent of total turnover in the legal services market goes on purchasing PI insurance.
Around £11m was paid out by the SRA Compensation Fund in 2018/19. In the same year the FSCS paid out £473m.
My conclusion will come as no surprise to you.
To my mind the fundamental failure in the advice sector is the inadequacy of PI obligations for advisers.
This is unfair to both advisers and consumers alike. It stands to reason that firms with adequate PI are not forced into insolvency because of negligence claims.
This isn't the only answer, but it must be part of the discussion around reducing the unpredictable but increasing burden the FSCS imposes on the advice profession.