The Association of Professional Financial Advisers (APFA) has today warned that the proposed new way of calculating compensation costs by the Financial Services Compensation Scheme (FSCS) could make levies more volatile and leave firms out of pocket.
APFA said it supported the scheme's proposed new way of calculating costs in principle but queried its approach to 'exceptional factors'.
Under the proposals, which the FSCS published in a policy update yesterday, the scheme would base its fees calculation on the average of the proceeding three years' expected compensation costs - or one year's, whichever is the greater.
The scheme argued this way of calculating fees would allow it to "reduce the volatility of annual levies, reduce the likelihood of interim levies, and give the industry greater certainty."
However, APFA said its approach to 'exceptional factors' would distort its calculations and achieve the opposite.
For example, it said, the FSCS would not have regarded the collapse of Keydata as exceptional and would not have accounted for it in its fees calculation.
APFA director general Chris Hannant (pictured) said: "We are concerned by the approach FSCS is taking to the ‘exceptional' factors they would adjust for, and believe the calculations will be distorted as a result.
"The FSCS has said it does not consider events such as the Keydata collapse as exceptional, and would therefore not adjust for it when calculating average compensation costs.
"We would argue that a breach of the class threshold, which has only happened once in FSCS's history, is exceptional, and the effect it has on the numbers could be significant.
"By taking its proposed approach, FSCS is distorting the calculations and risks making levies more volatile and leaving firms out of pocket. We urge the FSCS to look again at its approach, and reconsider the criteria it will use to determine exceptional factors."
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