PIMFA, the trade association for the wealth management and financial advice industry, has called for immediate action to reduce the cost of the Financial Services Compensation Scheme (FSCS) to firms while ‘much needed’ reform takes place.
The ever-increasing FSCS levy is the clearest indicator of consumer detriment and that work is needed to improve the regulation and supervision of this sector. But as the Financial Conduct Authority (FCA) have said themselves, this reform could take years to have an impact.
This is clearly unsatisfactory. So as an interim measure that could have the immediate effect of bringing the FSCS levy back under control, PIMFA proposes that FCA fines imposed on firms for regulatory failures – other than the small proportion given to charity – contribute to funding the FSCS rather than being paid to the Exchequer. This would either limit FSCS levy increases to a more manageable level or, potentially, reverse FSCS levy increases altogether.
PIMFA is also calling for the FCA and FSCS to increase efforts to recover funds from firms or schemes that have failed and ensure they take action in all cases that could reduce a potential levy payment for firms in the same class.
PIMFA believes that the producer of any product that could be eligible for compensation under the FSCS should contribute to the cost of the scheme. The vast majority of retail savers would also expect almost any financial product they purchase to be regulated. As outlined in PIMFA’s recent paper on the FSCS there is scope for the regulatory perimeter to be reviewed and expanded.
Finally, PIMFA is also calling for the FCA to make better use of its powers to prosecute firms for criminal offences than it currently does. While many firms, which ultimately fall onto the FSCS, do so for reasons which do not stray into the realms of criminality, PIMFA remains convinced of the need for deterrence and that it remains vital that firms are aware that they could potentially face criminal prosecution.
While PIMFA does favour the principle of a risk-based levy, which gives due consideration to the potential for a firm to fall onto the FSCS, this is a proposal that deserves deeper consultation, including how alternative levy models could work. Pursuing a risk-based levy will create greater demands on firms from greater transparency to holding more capital or a percentage of capital relative to specific lines of business. PIMFA remains adamant however, that any proposed solution should not be reliant on the Professional Indemnity Insurance market.
Tim Fassam Director of Government Relations and Policy at PIMFA, says: “The consumer investment market plays a vital role in helping people prepare for the future, with many PIMFA members providing exceptional products and services. But recent years have shown the harm that can be done to consumers when the market goes wrong, with well-run firms picking up the bill via the FSCS.
The FCA have shown they agree with PIMFA on many of the areas that require action, but our members have been raising concerns for years and cannot be expected to wait years for action. Having the polluter pay via FCA fines ensures a quick reduction that ensures industry support for the much-needed longer-term reform.”