The FCA and providers are set for further clashes after the regulator ruled last week that they must pay a quarter of advisers’ Financial Services Compensation Scheme bills.
In its final rules after a review of FSCS funding, the FCA outlined its requirement that providers must contribute 25 per cent of advisers’ bills to the lifeboat fund, despite widespread protestation from manufacturers.
Although the FSCS said it still needed to raise an extra £24m from advisers through an interim levy due to an increase in Sipp claims, blaming the frequent misselling of high-risk products, the FCA has thrown its support behind the increased costs for providers, saying they benefit from overall confidence in the UK market, and should be incentivised to design more readily understandable and customer-centric products.
Investment providers have seen their levy rise regardless, after the FSCS said last week it needed around £71m more than was forecast for 2018/19.
The regulator has also tried to make the lifeboat fund simpler, with life and pensions and investment intermediation to be merged into one funding class, and pure protection intermediation to be moved from the life and pensions class to the funding banner of general insurance.
On other issues, the FCA said there was widespread support, including plans to increase FSCS compensation limits from £50,000 to £85,000 for certain investment cases.
But what do the FCA’s changes mean for the relationship between the regulator, advisers and providers going forward?
A divided market
Plenty of large providers weighed into the FCA’s consultation, including the likes of Lloyds, St James’s Place and Standard Life.
The FCA notes “most” providers did not agree with its decision on increasing their portion of the levy, but adds the market did not come forward with any other viable suggestion.
The review says: “We have decided not to proceed with any of the alternative proposals because they add complexity and do not align with our policy intention to reduce volatility.” It adds: “While there are conflicting opinions, the need to secure appropriate consumer protection has been accepted consistently.
This requires, among other things, a sustainably funded FSCS.”
Some advisers argued the level of provider contribution should be as high as 75 per cent, pointing out that money from consumers eventually flows through to the providers of the underlying products used.
Advisers in favour of the levy say the interdependence of providers and intermediaries mean the benefits of consumer confidence created by the FSCS are shared.
Adviser view: Dennis Hall
Chief executive, Yellowtail Financial Planning
It’s not the first time the regulator has looked at these issues. It says it will do something, then doesn’t do anything. Here we are again only this time the providers are picking up the bill for the bad guys. Is this because regulators can’t regulate ahead of the problem? Providers aren’t happy they’ll be stumping up 25 per cent but it looks like advisers are going to be paying money for all sorts of things. The FCA is yet to fix the compensation scheme funding, or the Ombudsman funding. The compensation scheme funding is really the good guys having to bail out the bad guys to pay for all this.
Advisers are also arguably in less of a position to pay out extra costs compared with providers.
Investment Quorum chief executive Lee Robertson says providers have to look beyond who is at fault and see the greater good. He says: “The deeper pockets are with the providers, and if the providers want a thriving advice sector, they have to think about stumping up.”
A provider speaking to Money Marketing admits Sipp operators have “let the side down” but says fault ultimately lies with poor regulation.
They say: “Some claims now being experienced were caused by Sipp provider failures from past dealings. The reasons for these failings can in at least some small part be blamed upon the failings of the FCA to adequately regulate these providers.”
They add: “I’m not sure I can accept the FCA’s statement that this move is a reflection of its policy aims. The people who benefit are the investors and if a FSCS levy is to be applied to anyone it should be them.”
Paying up the chain
Firms in the review who responded to the FCA are also hitting back against the proposal for vertically integrated firms carrying out their own intermediation to effectively have to pay twice to cover advice outside of their in-house offering.
The regulator acknowledges many believe certain sub-sectors of firms should also be exempt from provider contributions, particularly those that do not rely on manufacturing their own funds, for example discretionary fund managers and depositaries.
Whether DFMs should be classed as providers continues to be a hotly-debated topic.
Robertson says: “Vertically integrated firms are charging twice. Effectively they are taking more of the fee spectrum across their products and advice range so if they are charging more in fees, they should be paying more of the levy.”
Vertically-integrated giant St James’s Place declined to comment to Money Marketing on the release of the review, after questioning its elevated £16.5m contribution to the FSCS in its most recent results statement.
The regulator is still weighing up whether levies can be risk-rated as it begins collecting new data through Gabriel. With professional indemnity insurers already beginning to withdraw cover for advisers providing defined benefit transfer services, many of which are in vertically-integrated firms, Appleton Gerrard financial planner Kusal Ariyawansa says the regulator should make tighter restrictions that give advisers better chances with insurers so that the FSCS does not have to take even more pressure.
Speaking at Money Marketing Interactive last week, Ariyawansa said mandatory recording of all calls and meetings with clients would increase PI insurers’ trust in adviser credibility and ensure they pay a greater portion of FSCS bills.
He said: “The regulator should enforce the recording of all conversations. Because DB transfers are so complicated, it’s vital we have a robust process to give protection to both the consumer and the adviser.”
Adviser view: Tim Page
Financial planner, Page Russell
Providers are generally raking it in off the back of DB transfers, so it can be argued that a little bit of burden sharing wouldn’t go amiss. The guys that play by the book will be paying all the fees at the end of the day. Until IFAs are forced to pay high PI premiums to have adequate PI policies that actually pay out when required and don’t fail and cause the companies to collapse and the firms to fall in on the FSCS, the cost will continue to rise. It is an indirect effect of inadequate PI premiums. IFAs do need to be thankful for small mercies though.
Quilter retail customer solutions director John Porteous says the FCA should be looking to wider reform and implement better rules reflecting the provider and adviser value chain. He says: “Reform of the FSCS has the power to create a fairer system that protects firms and customers, while also removing some of the barriers to growth. It’s about spreading burdens proportionately.”
Moving the goalposts
Increasing the threshold for investment claims by £35,000 is likely to make little practical difference overall, despite the FCA pointing to a seven per cent increase in claims over the current £50,000 cap that would have been covered by the higher threshold between 2010 and 2014.
Though the move affects less than a fifth of claims for investment businesses, the regulator argues increasing the limit will reduce customer confusion around various caps, reducing advisers’ workloads.
The current £50,000 cap for investment claims has been in place since October 2009 and is set to rise to £85,000 from April 2019.
However, the regulator says the majority of respondents who disagreed with raising the cap were investment intermediaries concerned with the knock-on effects for PII cover costs.
Although it does streamline reporting for advisers, the merging of life and pensions and investment intermediation into one asset class is also unlikely to have a significant impact on actually reducing the size of the total bill.
Downward pressure may come in the form of a new rule to stop PI insurers dodging payouts where the FSCS is a claimant and allowing the compensation to fall to the lifeboat fund.
The FCA’s review says: “The changes are intended to ensure that more consumer claims are paid by insurers, which could help to reduce the cost of the FSCS to other firms. We are proposing that personal investment firms should have PII policies that do not limit claims, where the policyholder or a third party is insolvent, or where a person other than the personal investment firm is entitled to make a claim.”
Moving forward, Quilter’s Porteous and Page Russell financial planner Tim Page are calling for greater attention to be paid to calls to introduce a risk-rated levy incentivising tighter risk management.
Porteous says: “It would encourage the right behaviour and ensure firms with a clean record and a well-managed business are not unfairly penalised.”
Following the spike in DB transfer claims and increasing PI bills, Page says some firms need more of a push to reduce risks in their businesses.
Page says: “If a risk-based levy is followed up, it’s going to be far more interesting than anything actually in the rules that have been published already. There’s nothing like being hit in the teeth with a higher levy to get one to change their business model, and that’s what is ultimately needed.”
Yellowtail Financial Planning director Dennis Hall says advisers will continue waiting for answers on more fundamental reform. He says: “I thought advisers were promised a proper review and resolution, but the regulator doesn’t seem any closer to that and while advisers still have the ability to pay, we will be squeezed.”
Comments on the FCA’s further consultation questions will be accepted until 1 August.
Expert view: Steven Cameron
Why providers should cough up too
It is widely agreed that the FSCS is a good thing, but how it’s funded has been highly contentious for many years. The vast majority of customers are well served by highly professional firms, and in today’s climate need advice more than ever. But things can go wrong and customers need confidence they’ll be compensated even if the responsible firm is no longer in business. That benefits every firm in our industry.
For many years, life and pensions intermediaries have had to cope with volatile levies. More recently, they have repeatedly had to pay the absolute maximum within the scheme, something which surely wasn’t the original intention. And it’s the vast majority who don’t generate claims who are meeting these costs, which just doesn’t seem fair.
Aegon has called on the FCA to make providers and fund managers pay a greater share of levies for intermediaries in ‘affinity’ markets so I am delighted the FCA will require providers to pay 25 per cent of insurance and investment intermediary levies from the first £1.
So far so good, but we’re urging the FCA to do more, to find ways to reduce overall FSCS claims and to introduce risk-based levies so those firms undertaking riskier activities, more likely to result in FSCS claims, pay more in.
We have also proposed that rather than FCA fines creating a windfall for the Treasury, wouldn’t it be reasonable to funnel some back into the FSCS for the benefit of our industry and its customers?
Steven Cameron is pensions director at Aegon