The Financial Conduct Authority admits that the cost of the levy on financial firms which pays for the Financial Services Compensation Scheme is ‘unsustainable’. Last year the FSCS predicted it would need £1 billion. A billion quid! To compensate victims of errors, mis-selling, frauds, and failed firms.
It did not turn out at quite that much, but at its present rate of growth it will only be a year or two before it reaches that milestone.
The FCA’s answer is to do its job better. In the long term that is of course welcome. Stable doors should always be shut quickly without consulting the horses while you oil the bolts.
In March the FCA did that when it used emergency powers (who knew it had them?) to act without consultation and freeze the assets at a couple of days’ notice of the 90 firms who may have mis-sold pension transfers to British Steel Pension Scheme members to ensure they kept the funds to compensate their victims.
Stable doors should always be shut quickly without consulting the horses
Financial Services Compensation
The levy paid by firms to fund the FSCS is the opposite of the principle of polluter pays. It is the good guys paying for the bad. That would not matter so much if the scheme just compensated the victims of the inevitable careless, unfortunate, and badly capitalised firms.
But it also compensates for the flock of phoenixes that have fleeced one set of customers and now reincarnate themselves with new feathers and a siren song to attract in more. At one time the Financial Services register had more lifeboats than the RNLI. No wonder the cost of this approaches a billion a year.
banks dominate the fines imposed by the regulator over the last 22 years
Some firms of course should pay – the banks who dominate the fines imposed by the regulator over the last 22 years have only themselves to blame for the high cost of regulation.
My table of those fines reveals that all the big banks have been involved in cheating each other over Forex and Libor, failing to prevent money laundering, or mis-selling to the public. So I have no problem with them footing the compensation bill even for the firms which exist to enrich themselves rather than their customers.
But when it comes to financial advisers I feel differently. I have been writing and saying that people who need professional financial advice should go to a good independent financial adviser since, well, since the term was invented at the end of the last century.
And most – no, almost all – of the advisers that fulfil my criteria of independence, chartered, and willing to charge through fees rather than an annual wealth tax, are good guys. They have the white Stetson and the silver bullets.
people who need professional financial advice should go to a good independent financial adviser
Of course, some may go wrong. Not least those who mis-sold pension transfers to workers in the British Steel Pension Scheme who have now had their assets frozen. But on the whole there are fewer bad apples per barrel than in many industries. So why do these good guys have to pay for the mis-selling bad guys?
Seven years ago, I suggested in these pages that the cost of compensating the victims of the bad guys should be paid from the fines levied on the financial services industry. So I was delighted to read that my idea has been taken up by the Personal Investment Management and Financial Advice Association (PIMFA).
In February it called on the FCA to use the £783,000 it fined Barclays Bank in February towards the cost of the FSCS and pointed out that in 2021 the FCA levied fines totalling more than half a billion pounds. That would be nearly enough to pay for the £584 million compensation awarded by FSCS in 2020/21.
Standing between this sensible idea and its implementation is the impenetrable bastion of the Treasury.
All we need now is a Chancellor who needs to polish his image by taking a bold decision
In 2013 Chancellor George Osborne decided to snaffle the net proceeds of FCA fines for the Treasury and give some of the money to service charities.
That decision would have to be reversed before they could be used to ensure, as I put it here on 30 July 2015, that “the bad guys would be paying for the really bad guys. Which would be a lot fairer on the good guys.”
All we need now is a Chancellor who needs to polish his image by taking a bold decision.
Paul Lewis is a financial journalist and host of Radio 4’s Money Box
Anyone care to give odds on the Chancellor taking this step?
The FSCS is collective punishment, as the FCA and treasury deem us jointly and severally liable for each other …pure and simple !!
The FSCS was never a sensible solution (for the reason above) even when levies were low or non existent but it went through the channels without much resistance.
The PII market is broken because the FSA and now FCA never really understood how influential their rules, guidance and warning are ….. one only has to look at the regulators interference, on property funds, with profit funds, structured products, pension transfers the list is endless …all giving PI providers (because its renewed annually) plenty of scope to load, exclude and censure areas of risk !! can you blame them ?
Let us not forget …the very first rule of an insurance company is …not to pay out !! the regulator gives the PI providers ample opportunity to do this
The regulator is guilty of nothing more than having a totalitarian mentality totally ignorant to the industry it serves (yes serves) thinking a scatter gun approach and sweeping everything up with a very broad brush is the answer !!
So hear we all are; good advisers (well their clients) having to pay levies along side their own PI insurance with the levies (in my case) some 45% larger than my PI !!