Pull the other one, Mr Regulator, a risk-based FSCS levy is too good to be true

On Tuesday morning (15 September) the Financial Conduct Authority (FCA) dropped its latest call for input request, this time on how to better the consumer investment market. The paper asks the questions you might expect: how can we make it easier for people to understand the risks of investment? How can people be better protected from scams? What more can be done to facilitate competition and encourage firms to develop innovative products? And so on and so forth...

The document also contained some shocking stats, including that consumers might only start to recognise that a financial promotion for an investment product is ‘too good to be true' when the promised rate of return is around a whopping 30% or more (I added that "whopping" for extra shock value - 30%?!)

If you were brave enough to have a rummage through the call for input, the spot where your interest as an adviser likely piqued was nestled 20 pages into the document: "We want to consider how we can have a system where firms which cause harm end up paying more of the bill before recourse is needed to a scheme of last resort," the FCA said, enticingly. A system where the polluter pays? Tell us more. 

The first signal the regulator offered up on its changing ‘polluter pays' tune came from its chairman Charles Randell. Back in June, he noted the already "unacceptable" levy was likely to increase as a result of the coronavirus crisis but, much more interestingly, he argued it should be redesigned so "polluting firms" footed the bill for high-risk investments and schemes, not well-run advice outfits through the lifeboat fund's levy.

One might even wonder whether it is Randell's influence at the regulator that has forced the FCA to address the issue again in this paper, and so recently after it looked at the very same problem a couple of years ago.

The watchdog suggests three approaches it is willing to consider to move more towards a ‘polluter pays' model. Unfortunately, it admits, "there are no easy answers":

1. Firstly, firms could be required to hold more capital based on the risk that their business presents. This could be based on the type of advice they give, or how they are structured and the likelihood their activity will cause claims in the future.
   
   
2. Secondly, changes could be made to the type and amount of professional indemnity insurance advisers are required to have, with the FCA caveating: "We would need to think about the impact our changes might have on how willing insurers would be to provide this insurance, and how much they would charge for it. The insurers would also have the problem of needing to know now which firms were likely to cause problems in the future, so they could charge the right price."
   
   
3. Lastly, the regulator could look for ways to ensure ‘riskier' firms pay more. This would mean finding a means of establishing which firms should pay higher levies and why, and keeping this up to date. The FCA adds: "… due to the time lag between risk arising and the need for compensation, today's riskier firms will not necessarily be paying for tomorrow's redress liabilities."

The regulator continues later on: "Consumers should be able to trust the advice they're given. While our work has shown that most can and do, the minority of bad advisers, and the advice they give, is damaging the reputation of the whole market.

"Tightening up on this is likely to increase costs for firms, the majority of which aren't giving bad advice. But they are already paying for the minority through FSCS costs, and behind every FSCS pay-out is a consumer who has suffered harm. This needs to change."

So, there you have it, promising messages coming from the regulator itself… Or not? Despite its apparent willingness to make changes, the FCA makes it crystal clear it is not gearing up for another review of the FSCS funding model, having already carried out one of those from 2016 to 2018.

To quash even the slightest glimmer of hope that may remain, it adds: "Reviewing how we distribute the costs of FSCS will not deal with the fundamental issue that the costs are too high, to begin with."

The problem is, a lot has changed since that last paper. And revisiting this previous FSCS funding consultation paper, which began in 2016, definitely lends some perspective on how the advice market has changed over the last few years.

For example, back in 2013/14, the lifeboat fund requested around £100 from the intermediation pool containing financial advisers, and that rose to almost £200m in 2015/16. The figure for 2020/21 has been set at £229m and there was a £50m surplus levy lumped on top of last year's bill for advisers to boot. Costs are rising and they only look like they are going to continue climbing north.

'No easy answers'

In addition, none of the proposed measures offer anything that looks like a silver bullet. To the regulator's credit, it freely admits there are "no easy answers", but it's particularly difficult right now to imagine an already-stretched regulator coming up with a brand new and workable system of what constitutes as ‘risky' for the sake of the FSCS levy.

Just because there are no easy answers though, it doesn't mean a better solution isn't worth searching for. As I'm sure many advisers, who have been receiving 30%, 40%, and even 50% increases in regulatory bills coming through the mail in recent weeks, would agree.

So the only thing to do now for advisers is to keep the pressure on. Make your voices heard and respond to this call for input. Outline exactly why sky-rocketing regulatory bills make no sense for a business that has next to no complaints and does not advise clients to invest in unregulated schemes. The FCA is beginning to show it is hearing advisers, but now you need to make it listen.

Because we all know: the good guys shouldn't pay.

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