The unpredictable nature of the Financial Services Compensation Scheme (FSCS) levy is a thorn in the side of many advice businesses and is currently under review.
Advisers who responded to the Financial Advice Market Review (FAMR) call for evidence made it clear that huge variations to the levy made it hard to plan effectively and that the cost of funding the FSCS is not being borne by the right people. In effect, it’s the ‘good guys pay model’.
Many advisers claimed the levy represented a barrier to providing “affordable financial advice, primarily due to its size and volatility”.
FAMR recommended that the Financial Conduct Authority’s (FCA) 2016 levy review should explore risk-based levies, reforming the FSCS funding classes and also recommended looking at whether contributions from firms could be smoother by making more extensive use of the service’s credit facility.
Many in the industry also want a product-based levy to be considered, however, despite lobbying from organisations such as adviser network Tenet, it is thought the FCA has ruled it out as changes to legislation would have to be made.
The Association of Professional Financial Advisers has also blamed the levy on a 10% drop in adviser profitability during 2015. It’s said in March profits at adviser firms fell £100m in 2015 compared to 2014 and blamed the “unsustainable” FSCS levy.
Unpopular levy
RP asked advisers for their views on the complex topic. Firstly, we asked if businesses had been hit by an unexpectedly high FSCS levy bill.
More than half, 53%, said ‘yes’, while 47% had not.
Of those who said ‘yes’, some branded the levy a disaster for advice businesses and an “unfair burden”, others said the costs would have to be passed on to clients.
One adviser said: “I have been soaking up this increase but will have to start passing it on to clients through increased fees.”
A second added: “It feels like I am being penalised and made to pay for mistakes and bad advice given by others. I have no control over these people and should have no responsibility for [their actions.]”
“My fees more than doubled this year,” said another adviser. “I work on a low-cost advice model, but it makes you realise the importance of charging enough to cover these sort of fees.”
One adviser was particularly aggrieved: “It is disproportionate to the risk of the business that I write. I am also very cost competitive so do not have a large slice of profit from which any levy can be paid. Levy increases have a significant impact on future business expansion, investment and reduce the amount of pro bono work I can do.”
Many others said the model was unfair, in need of change and “punishes everyone, not just the guilty”.
Risk-based levy
RP also gauged adviser views on the viability of a risk-based levy. Some 63% backed the idea, while 8% did not and the rest, 29%, were unsure.
Those in favour of a risk-based arrangement suggested the model could work in a similar way to professional indemnity insurance (PII).
“Advisers who wish to be involved in higher risk products pay more and provide proof of PII cover, they should also get special permission from the FCA,” said one adviser.
Another added: “It should be based on the number of product sales in ‘high-risk’ areas. That way, if you don’t’ advice and sell ‘high-risk’ products you don’t have to pay towards the costs when it all goes belly up.”
A third commented: “Those companies with poor track records who have been involved in more risky areas of financial advice or who experience high numbers of claims should pay. Those with clean sheets should benefit from some sort of no claims discount as a way of encouraging them to run low-risk businesses.”
However, others pointed out defining risk was very important.
“Often the regulator defines things too simply,” an adviser commented. “For example, if someone advises on EIS and VCTs (as these are regarded as higher risk products) should their levy be higher? I don’t think so. If a company has adequate compliance functions in place then only appropriate clients are recommended these products, thus there is no additional risk.”
Another added: “It is not beyond the wit of man, including the FCA, to add a proportion to each policy sold. If the FCA spend more time sorting out rogue sellers rather than politicking perhaps they might agree to sort it out.”
Shifting product
A product-based levy has been backed by some in the industry, however, reports indicate the FCA isn’t keen. We asked advisers what they thought. Some 48% thought it would be a mistake for the regulator to rule it out, 40% were unsure and 12% thought a product-based levy wouldn’t be suitable.
Of those who backed the idea many said it seemed like a “logical step” but one adviser said: “The FCA simply doesn’t have the bottle”.
Another said: “I feel the FCA is being stubborn. It is ignoring evidence and is more concerned about losing face if it backtracked on what it has previously said.”
A third commented: “It seems the easy way out for the FCA, also they do not like to be seen to respond to pressure.”
“A product-based levy seems to be a logical step,” according to an adviser. “Too many companies fail through poor practice or out and out illegal activity. A product-based levy would provide a layer of comfort (hopefully!)”
“There is a world of difference between risky products and bread and butter products – a premium for risk makes sense and should discourage at least some bad practice,” another said.
One idea put forward was for a ‘premium tax’ on specific products. “We already have the insurance premium tax (where does that money go by the way?) so why not have a pensions premium tax or investment premium tax or something similar?”
Penalty notice
Finally, we asked advisers if fines levied by the FCA should be handed to the FSCS rather than going into Treasury coffers.
The vast majority, 82%, said ’yes’; 6% said ‘no’; the rest, 10%, were unsure.
One financial planner who said ‘yes’ commented: “It is only fair that fines should be siphoned back. Currently, the full 100% goes to the Treasury, running to billions over the past few years. The FSCS should at least get 50%. The Treasury should not take it all.”
A second added: “Most definitely. It is a national disgrace that the government is benefitting from banks etc giving bad advice or having bad practices.”
“This makes total sense,” said a third. “Ring-fence the industry to pay for the industry.”
Another commented it would reduce the cost of advice and make it easier for more people to access an adviser.
One adviser who said ‘no’ commented: “The FCA and FSCS would be better engaged by outlining what is and what is not acceptable practice, and what will not give rise to future legal action on a firm. If should be transparent and both organisations should be manned by individuals who are qualified and have had experience in dealing with the public at first hand.”
One respondent who was unsure pointed out the idea of FCA fines going to the FSCS could have the potential to make the two organisations somewhat “symbiotic instead of independent”.
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