Earlier this year we coordinated a day of action, presenting 1,421 signatures to Financial Secretary to the Treasury Mark Hoban MP, asking for his help to create a fairer Financial Services Compensation Scheme (FSCS).
Today we see the publication of a long-awaited consultation paper from the Financial Services Authority (FSA), addressing this issue.
There are no easy answers to FSCS funding.
We view the FSCS as a vitally important tool in ensuring consumer confidence. When financial services companies go bust, it is quite right that an industry-funded scheme organised by government should bail out innocent investors.
What we have been campaigning for over the past couple of years is a comprehensive review of how such a scheme should be funded.
With our own FSCS levies going through the roof in 2011 and 2012, due entirely to the default of financial firms we never recommended, it is really important that FSCS funding is reformed.
The cost of FSCS funding is always ultimately paid for by investors, through product and advice charges, so finding the right funding model for the FSCS is of vital importance.
Looking at the FSA consultation, they are proposing two separate approaches. This reflects the new regulatory approach; with some firms being regulated by the Prudential Regulation Authority (PRA) and some by the Financial Conduct Authority (FCA).
We are pleased to see that the two would not be subject to any cross-subsidy. This means that the failure of a bank or insurance company, both regulated by the PRA, would not result in FSCS cost implications for a firm of Chartered Financial Planners (regulated by the FCA).
It is disappointing to see there are no planned changes to the various FSCS funding classes.
As things stand, the investment distributor sub-class includes a number of firms that bare no resemblance to an IFA firm, such as penny share brokers and fund managers masquerading as distributors.
The intention to spread FSCS funding costs over a three year rather than one year period is welcome. While this might result in some additional short-term costs, it should make our business forecasting a little easier to undertake.
Running a business where such a large item of regulatory expense can vary wildly within the space of twelve months is a nightmare for all directors.
Higher thresholds for each sub-class look like a mixed blessing. Overall this should result in a fairer outcome, although only if firms within sub-classes are better categorised.
This consultation paper is a welcome acknowledgement that FSCS funding needs overhauling.
It contains some improvements to the current system along with some bizarre conclusions we look forward to challenging within our formal response.
