The FSCS plays a vital role in UK retail financial services ensuring consumers can confidently save and invest. But every individual that has sought compensation through the FSCS has already suffered a poor outcome. PIMFA has consistently argued that policy should be designed to minimise the need for the compensation scheme and protect consumers before the harm occurs - rather than allowing harm to occur and relying on the FSCS as a safety net.
In its latest policy paper, A rising tide lifts all boats?: A roadmap towards better consumer outcomes and lower levies, PIMFA argues that without a wholesale review of the fundamental drivers of calls on the FSCS, the total compensation bill will continue to rise for all advisers and wealth managers regardless of any review of the levy’s construction.
PIMFA has identified three-interconnected issues that ultimately lead to consumer harm:
• The inadequacy of supervision and regulation carried out by the Regulator – a failure to protect customers from unregulated products and supervise firms adequately directly contributes to customers requiring the FSCS
• Market distortion – the FCA’s regulatory approach incentivises some firms to fold their company to deliberately transfer risk to the FSCS – often selling assets first
• The structure of the Financial Services Compensation Scheme – it is unable to take account of the risk that any given firm presents to the market. By continuing with the current funding approach, the FSCS continues to penalise prudent firms whilst in effect providing a no risk default environment
The existence of a levy which continues to incentivise poor outcomes for savers and the profession, is something which clearly needs review.
PIMFA sets out a roadmap towards providing better consumer protection while also lowering levies by calling for the following:
• HM Treasury to review the drivers of FSCS levy costs and review the regulatory perimeter against this.
• HM Treasury to review what allows firms to transfer risk onto the FSCS to cause market distortions including phoenixing and identify ways of legally limiting firms ability to transfer risk onto FSCS in future.
• FCA to review its supervisory approach against risk assessment of firms adding cost to FSCS and report against this.
• FSCS to review intelligence provision and provide an annual assessment of whether the FCA has acted upon it.
• FCA to review levy construction and consider a risk-based element and how to boost recovery from the original firm or product.
Liz Field, chief executive of PIMFA, commented: “PIMFA and our members firms are fully committed to ensuring that consumers are protected via the FSCS”.
“However, the current environment allows some firms that simply should not be in business, to transfer their responsibilities to compensate their clients onto the rest of the industry through the practice of phoenixing. Lifeboating is also a key challenge.
“Aside from the direct harm this causes consumers, this tarnishes the financial advice and wealth management sector as a whole and creates an additional financial burden on well-run prudent firms. Firms need to continue to invest in their innovation and this is impacted by the exponential rise in FSCS fees.
“We are aware that this is a complex issue and, as a result, there is no single cure that will provide a solution. But we urge the Government and the FCA to work with us in order to ensure that the FSCS and the regulatory structures can more effectively protect against harm, ensure the advice gap doesn’t further widen, and provide confidence to both consumers and the firms which fund it”.
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