A balanced view
Ken Davy, Chairman, The SimplyBiz Group
It is a real pleasure for me to congratulate Ronnie Taylor of Scottish Widows on his thoughtful and constructive article on the future funding of the FSCS.
For such an important and respected product provider to acknowledge the unfairness of the current FSCS funding is of itself an important milestone. As you know, I have fought long and hard against the fundamental unfairness of the FSCS levy. It is therefore very encouraging to see this simple, yet obvious fact being acknowledged, first by the FCA in its Consultation Paper and now by such a major product provider.
Perhaps even more importantly, as regards the solution, Ronnie’s article recognises that product providers have a significant part to play in contributing to a solution. They have the ability to identify, and avoid, market risks and therefore help to ensure that the FSCS funding falls to a greater extent on those providers and firms creating the liabilities.
All product providers, as well as clients, however benefit from the existence of a strong, vibrant and successful financial advice sector. I therefore believe it will be important that the core funding of the FSCS involves contributions from all providers to ensure that their market knowledge is used proactively to reduce the number of calls on the FSCS, combined, where possible, with a higher proportion of costs falling upon those involved in higher risk products.
Sharing costs across the product providers’ value chain, whilst also using risk based levies and improvements in PI cover to change the funding of the FSCS has the potential to reduce its overall liabilities whilst dramatically, and rightly, reducing the costs to financial advisers.
Well done and congratulations to Scottish Widows and Ronnie Taylor on such a significant and constructive contribution to this important debate.
Fairness in FSCS Funding
Ronnie Taylor, Distribution Director, Scottish Widows
For a market to function effectively and fairly there must be a correlation between the amount of risk a party takes and the amount it pays to mitigate the risk. This is hardly a controversial view, but it is a broken relationship between risk and cost that is causing unfairness in the way the Financial Services Compensation Scheme (FSCS) is funded.
While everyone in our industry benefits from the underlying protection and reassurance the FSCS offers our customers, we’re concerned that under current arrangements, advisers across the board are being asked to cover costs caused by a small number of firms operating in higher-risk areas. This is unfair to most advisers and fails to align cost to risk in an effective way.
In its consultation on FSCS funding, the Financial Conduct Authority (FCA) discusses an increase in the value of claims made, driven in particular by claims against advisory firms in relation to SIPP products, especially involving non-standard investments. It also reflects on a Professional Indemnity Insurance (PII) market that isn’t working well enough to prevent claims being made on the FSCS.
The FCA reminds us that the FSCS should be the last resort, and states that where inadequate PII coverage leads to increasing FSCS levies spread across all firms, this does not follow the FCA’s principle that the “polluter pays”.
Following the consultation, we hope that the FCA will take steps to ensure:
- levies to fund the FSCS better reflect the likelihood that a firm’s customers will need to make a claim (a risk-based approach)
- the market for PII is improved, so calls on the FSCS are fewer, funding requirements reduce, and firms pay insurance premiums that reflect the amount of risk they choose to face.
To ensure risk and cost are aligned, a new FSCS funding category may be needed, to separate higher-risk activities from the rest of the advice market. Further consulting across the industry would be required on where to draw the line, but we could look to investments that fall outside the FCA’s permitted links.
This would ensure that risk is appropriately priced into a firm’s business model and, as well as increasing fairness, may yield a shift away from complex products and reduce the numbers of claims to be made on the FSCS.
Sharing costs across the value chain
The FCA considers whether product providers should contribute to claims involving intermediaries. We believe a risk-based approach should be taken – in the same way that we wouldn’t expect intermediaries who haven’t participated in these higher-risk areas of the market, to pay increased levies, we don’t believe product providers that have avoided such parts of the market should pay more either.
However, where certain types of products or investments are linked to a higher likelihood of FSCS claims, all parties profiting from their sales should pay more to fund the FSCS, including product providers in those areas. This should drive better discipline across the value chain and lead to better customer outcomes.
Ultimately, a claim on the FSCS is not just a cost to businesses; it’s the consequence of a bad customer outcome. Bad outcomes give the whole industry a bad name, and we can all benefit if a fairer approach to FSCS funding improves the way financial markets work for customers.