The Association of IFAs has backed what it calls "radical" changes the FSA plans to make to the way advisers fund the Financial Services Compensation Scheme.
AIFA says the alterations, which have not yet been implemented, will produce a “fairer, robust and sustainable” FSCS.
The FSA says the reforms are designed to spread the cost of compensation between regulated firms “as fairly as possible and be relatively simple to administer”.
Plans include introducing a new model of funding whereby only the firms in a particular sub-class (i.e. pensions) will have to stump up the initial costs for compensation emerging from that sub-class.
Put another way, firms in the investments sub-class would not have to pay the first phase of compensation costs emanating from the pensions sub-class.
In addition, the FSA plans to expand the overall financial capacity of the scheme, up to a maximum of £4.4bn each year.
Chris Cummings, director general of AIFA, says: “The FSCS is a vital regulatory safety net which helps maintain consumer confidence in the financial services industry, but it is in need of urgent reform if it is to continue to deliver its objectives.
“AIFA supports the principles behind the [FSA] proposals. If implemented, we believe the FSA’s reforms will produce a fairer, robust and sustainable Scheme which recognises mutual financial interest and the responsibilities of all parties.”
He adds: “The current scheme is inequitable because it fails to apportion costs fairly to those firms which have profited from the business.
“This places a disproportionate burden on the IFA sector, which risks further defaults and therefore makes the current basis unsustainable.
“Had the principle of mutual financial interest been in place from ‘day one’ a completely different economic model would now exist.”
AIFA also says the current model of levying the FSCS, given the diminishing numbers of advisers and adviser firms, is pushing up costs for everyone else.
According to the FSA’s annual report the number of approved firms fell from 28,969 in 2005/6, to 28,281 in 2006/7. The number of approved persons fell from 167,276 in 2005/6 to 164,821 in 2006/7.
The FSA says the changes will improve dramatically the current model.
FSA director, Graeme Ashley-Fenn, says: “We believe the proposed model is more rational, fairer to the various players in the market and more robust.”
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