Financial advisers could wind up paying more towards the Financial Services Compensation Scheme (FSCS) unless it re-thinks proposals designed to reduce the volatility in the amount firms pay, the Association of Professional Financial Advisers (APFA) has warned.
The FSCS is proposing to change the way it calculates fees to a system based on a three-year average cost of compensation, not including 'exceptional' circumstances, to lower the chances of raising interim levies.
However, in its calculations to show how this might have worked in the past three years, the FSCS did not consider the collapse of Keydata to be an exceptional event, even though it triggered the scheme's cross-subsidy model for the first time in its history.
Though APFA applauded the FSCS's efforts to provide more stability and foresight of potential costs, it said it was concerned about its "lack of clarity" over its definition of 'exceptional' factors.
"While we agree with the idea of using past experience adjusted to take account of current trends and market experience, [the] FSCS needs to think again about the way it defines ‘exceptional' factors," APFA director-general Chris Hannant said in an updated response to the proposals.
"According to its proposed approach, the FSCS would, in all likelihood, almost never adjust for exceptional factors, rendering this step in the process meaningless - which we do not believe is its intention.
Hannant said APFA believed a breach of an FSCS class threshold should be treated as exceptional - pointing out there was only one occasion when the cross-subsidy provisions were triggered, which was Keydata.
"The Keydata collapse would have significantly distorted levies under the proposed system, as £150m would have been collected every year since 2010/11.
"However, since compensation levels spiked at £277m that year, they haven't been higher than £109m since. It is hard to see, therefore, exactly how FSCS could have justified asking for £150m in any year subsequent to 2010/11.
"Ultimately, this proposed approach risks firms paying more in fees to FSCS than necessary. There needs to be a re-think to ensure this does not happen, which means reconsidering the criteria it will use to determine exceptional factors."
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