Why the polluter never pays
As a Financial Conduct Authority (FCA) authorised and regulated firm, we are required to have several arrangements in place to protect our clients in the unlikely event of not doing our job correctly.
We also have to put in place arrangements to deal with the firm going into liquidation and leaving behind any client liabilities for poor advice.
Professional Indemnity Insurance (PII)
Just like other professional practices, Solicitors and Accountants, for example, we have to hold suitable PII to ensure that any claim upheld by the Financial Ombudsman Service (to an amount of £350,000 for complaints after 5th April 2019) can be paid.
Like other types of insurance, PII generally has an “excess” payable by the policyholder in the event of a claim. Depending upon the kind of claim, this can typically be between £5,000 and £20,000.
Premiums are risk-based and expressed as a percentage of turnover.
The cover is becoming harder to obtain; it is a mandatory regulatory requirement that we have it, because of the number of claims against the intermediary financial sector has risen significantly.
The regulator also requires that we hold sufficient capital in our business so that in the unlikely event that we are wound up and have outstanding claims against us, our clients can be compensated.
This means holding a lot of cash that cannot then be employed in the business, for example, to recruit more staff or make investments in improved services to our clients. It’s effectively “dead money”.
Financial Services Compensation Scheme
This compensation scheme applies when a firm has gone into liquidation, and it has outstanding claims against it (not covered by the PII or by the capital adequacy of the firm).
The FSCS is funded by levies against authorised and regulated firms. A levy is paid each year, and interim levies are raised when needed.
For the 2020/21 year, the overall cost of compensation is a staggering £635m. This total cost is some £87m more than the previous year/
So it’s not the polluter who pays!
The firm that has sold inappropriate investment products to its clients and then failed as a business, there is a provable correlation between those two actions, isn’t the one paying these levies.
The payer is the firm that continues to trade, delivering the very best advice it can to its clients.
It could be argued, of course, that it is you the client who is paying for this through the fees that you pay to your adviser
A product levy to cover the cost of the FSCS seems like a practical and sensible idea but at the moment that looks unlikely.
So if your adviser tells you that they are raising their fees to cover the additional regulatory costs they are facing, chances are a big part of that cost will be their PII premiums and their FSCS levies.