Protection for your savings & investments
You might have seen the new television advert from the Financial Services Compensation Scheme (FSCS) recently.
It features a plasticine man ignoring signs about bears and picnics before apparently having his head bitten off by a bear.
The advert was created by Aardman Commercials, the same people behind Wallace and Gromit, to raise awareness of the benefits of the protection scheme.
It finishes by explaining that the scheme protects your money in eligible savings, investments and insurance, should your provider go bust. The advert describes how the FSCS is set up by Government and that limits apply.
What it doesn’t explain is that the scheme is funded by the financial services industry.
As a firm authorised and regulated by the Financial Services Authority (FSA), we pay a levy each year to fund the FSCS and provide compensation to any investors who have been unfortunate enough to have money with a failed institution.
In recent years, we have also had to fund an interim levy – last year paying this interim levy in April.
Another interim levy was announced by the FSCS yesterday. This time, the total interim levy for 2010/11 is likely to reach £326m. As part of the investment intermediary sub-class, we will have to pay our share of £93m of this.
The interim levy, which is being raised in addition to the main levy in the summer, is to pay for the failures of Keydata Investment Services, Wills & Co and other investment firms.
Keydata Investment Services went into administration in June 2009 following the collapse of the structured investment products they were selling through financial advisers.
There has been a lot of debate recently about the categorisation of Keydata as an investment intermediary rather than as a product provider. A group of around 200 IFAs funded a judicial review which concluded that the FSCS had followed the correct process in defining Keydata as an intermediary.
Wills & Co was a stockbroker, fined £49,000 by the FSA in October 2007 for being unclear, unfair and misleading when advising on penny shares. Despite this fine, they were censured by the regulator again in February 2010 for not taking remedial action. Their liabilities to customers eventually fell on the compensation scheme.
In 2010, the direct cost of regulation (which includes the levies we paid the FSCS) cost us around 5% of our total expenditure during the year. We estimate the indirect cost of regulation to be several times this amount.
Whilst the categorisation of Keydata Investment Services as an intermediary, which results in us having to pay for their failure, is fundamentally unfair, we recognise the importance of the Financial Services Compensation Scheme (FSCS) in ensuring savers and investors are confident about placing their money with authorised firms.
As we open our cheque book to pay this latest levy, we hope that the structure and funding arrangements of the Financial Services Compensation Scheme are thoroughly reviewed before too long.
We also hope that moves by the Financial Services Authority to improve the regulation of all financial advisers will reduce the amount of poor investment products being sold to consumers, thereby reducing our exposure to compensating failed products we would never dream of recommending to our own clients.
In case you haven’t seen the FSCS Aardman advert yet, here it is: