Product Levy v FSCS Adviser Firm Levy

Product Levy v FSCS Adviser Firm Levy.

There has for a long time been a finance industry debate about how the Financial Services Compensation Scheme (FSCS) is funded. Currently, whilst many think that the government fund the compensation scheme, it is actually paid for by levy by registered and regulated financial services companies. Banks, insurance companies and insurance intermediaries each fund their own fee block. Each making a contribution based upon turnover in certain sectors of their respective business. Ultimately, it is the consumer that pays via the charges within their bank accounts, insurance policies and intermediary services such as financial advice.

The reality is that some pay more than others particularly in the intermediary fee block as it is such a wide ranging block and most advisers or brokers do not give advice on all arrange product sales across the whole range. For example, we are independent financial advisers yet because of the block that we are in we are also authorised to be stockbrokers. This means that if a stockbroker goes into liquidation and leaves their clients with financial losses, we are required along with other advisers to pay any increased levy as a result of the stockbroker collapse. We have given this as an example because in reality a huge stockbroking firm collapsed a couple of years ago resulting in multi-million pounds in compensation being paid out to investors by the FSCS.

There is currently a review of how the compensation scheme is funded to try and introduce fairness to all. Why should a financial adviser involved in lower risk investments have to make compensation scheme levy payments for compensation paid out for high-risk pensions or mortgages?

In an effort to achieve fairness some are suggesting that a levy be based upon the product sold. Therefore, if an adviser only advises on low-risk ISAs, yet another advises on higher risk defined benefit/final salary pension transfers then the ISA adviser will pay a lower levy per sale and the higher risk pension transfer adviser should pay a higher levy per sale. This would appear sensible and it would mean that those firms who sell large volumes of higher risk business will pay higher levies and those firms that sell low volumes of high-risk business all over volumes of low-risk business would pay less. It is not fair that a high-risk firm with a greater risk of complaint, compensation payments and therefore collapse should pay disproportionately less to the amount of income they have received from higher risk sales.

No doubt, these costs would be passed onto the consumer in terms of the fees that they pay either directly as a levy per policy sold or alternatively the adviser pays the levy based upon the number of policies sold. We repeat this makes total sense but as ever lawmakers do not like the idea because no longer would “the good" subsidise “the bad and the ugly".

Comment

The sooner the compensation levy is based upon numbers and volume of product sales the better. In addition, we also suggest that firms that receive low volumes of complaints should also benefit from a discount not just on their FSCS levy but also on their FCA fees and Financial Ombudsman Service levies (the ombudsman is the independent arbitrator that makes decisions when complaints are made and are in dispute between a financial services firm and their client). Again, a low-risk, low turnover, low complaint firm ("the good") should not have to subsidise larger turnover firms with high complaints volumes and higher risk business.