The Financial Conduct Authority (FCA) is to commence a review of how the FSCS is funded in 2016. FAMR recommends that this should explore:
• risk-based levies;
• reforming the FSCS funding classes;
• whether contributions from firms could be smoothed by making more extensive use of the credit facility available to the FSCS.
Following its review of FSCS funding, and in the light of the evidence from that review, the FCA should consider whether there is a case to look further at the professional indemnity insurance (PII) market in relation to the suitability and availability of cover for smaller advice firms.
The FAMR also dealt with other issues:
• the lack of a long-stop after which consumers cannot complain about financial advice.
FAMR has considered the case for a blanket 15-year limit on liability for financial advice and has concluded that this would not be in the interest of consumers, especially given the risks that arise with long-term products.
• the fairness of the FSCS levy.
Under the current funding model, a firm’s levy is proportionate to the size of its annual eligible income and the amount of FSCS compensation accrued by its individual funding class. Each firm is placed in the FSCS funding class that best matches the services it provides, such as general insurance intermediation, and sees it contribute to the FSCS compensation costs created by its industry peers.
• the FSCS levy does not reflect whether a firm is engaged in specific complex and higher-risk activities.
Why should the wider advice industry pay for the compensation costs incurred by a minority of firms? FAMR has therefore concluded that there is merit in considering possible ways to redesign the levy without reducing consumer protection.
The FSCS is the backstop part of the structure of consumer protection within financial services. The rules are set out by the FCA and the Prudential Regulation Authority. The rules should be followed by all registered intermediaries, and the intermediaries are covered by PII. If things go wrong for the registered firm, then the FSCS is there to cover the uninsured liabilities.
Consumer protection is paramount, but the problem is, who should pay for it? The paradox is that the main costs of FSCS are the claims that are paid out on behalf of firms that are no longer paying into the scheme, and the scheme is funded by all the firms who receive no benefit from it. The review is looking into how this situation can be made fairer for all concerned.
Should firms operating in higher-risk areas pay more? Should firms with histories of upheld complaints against them pay more?
Certainly, it would seem to be logical to go down a risk-based or product-based level of tariff. However, this could lead to advice gaps, as advisers may well avoid advising in the higher-risk areas in order to keep costs down. Advisers already exercise this choice as they tend to be governed by their PI cover providers in this respect. The networks already do this to make supervision more straightforward and to minimise their liabilities.
