FCA must think again on FSCS

The trade papers will probably tell you to rejoice that FSCS fees may get cheaper thanks to some proposed funding from providers. But we have been here before. We had provider support with the PIA but, as it was a voluntary arrangement, it quickly fell apart after just a few years.

What is really needed is a permanent solution to an ongoing problem that refuses to go away. We must avoid another set of quick fixes which won’t last any longer than previous attempts – ones which merely served to paper over the cracks.

Let’s look at the prime drivers.

The amounts paid out by the FSCS will continue to increase for the foreseeable future

No Long Stop means every additional year traded makes another year for claims. FSCS can still pay out on claims for advice given in 1988 - and earlier. This is compounded by the actions of FOS who are increasingly making judgements outside the normal tenets of commercial law, creating more company failures.

FSCS cover should be funded by those who seek to benefit

The current FSCS scheme has a profound funding mismatch. There are 16m potential claimants on FSCS - that being the sum total of all those who have received advice since 1988.

The current FSCS is paid for only by the 6m clients who sought advice this year, which puts an unwieldy burden on the currently advised. Any idea of a levy on new products would do the same. This method makes the cost of FSCS a major disincentive to the widening of advice which the FAMR initiative seeks to encourage.

If we want to expand the availability of advice and create a cast iron solution, we need to devise a method that spreads the funding throughout as many of the 16m as possible. The most obvious way would be to put a specific charge on investments. That way, all those holding products and solutions would be contributing, even if they are not currently receiving advice. Given the number of product providers and platforms currently operating, this specific charge would be demonstrably easier to collect than the current system.

Giving certainty to the PI Market

From the FOS perspective, PI exists to pay out what ever awards are given. This attitude has been causing problems for a very long time. Consequently, we now have fragmented PI cover and those members of the PI market who are not in open revolt are fast leaving the market.

The PI market and Advice market are intimately entwined. Either we have a healthy PI market and independent advice – or we have no PI and no advice.

Reforming FOS

Most Ombudsman schemes content themselves in giving the client a dispute system that delivers what they might receive in a court of civil law. The rules of evidence, limitations and judgments are the same and it works for both sides, as neither really wants the costs of a court.

But FOS has slowly separated itself from mirroring civil law and has instead embarked on a restitution regime which no law court would contemplate. And this is all delivered without limitations or the safeguard of appeal.

The number of failed firms and claims would diminish expedientially if FOS and FSCS stuck to resolving claims purely based on commercial law. Good quality PI Insurance would be maintained and the number of successful claims would drop.

The fantasy of risk-based FSCS charges

The FCA’s divisive answer is to split advisers between “risky” and “Safe”. Those who are proven to have advised on high risk products will fall into the “Risky” category.

But for this to work, a significant number of advisers would have to be placed in the section, otherwise why bother? Those designated as being "risky" are likely to face both higher FSCS charges and higher PI charges, thus compromising the financial health of their business. They are therefore more likely to fail (and to phoenix) so we end up with less advisers paying more FSCS charges. Applying additional charges to designated “risky” firms will surely be a short-lived idea.

Change PI Cover

Perhaps most bizarre element of CP16/42 is the idea that all advisers should be shoe horned into one insurer. Those of us with long memories will remember that FIMBRA tried this early on and failed.

The attraction of this idea to the FCA is that it and FOS can continue to act as the consumer's guardian angel, awarding pay outs as they see fit whilst their captive PI company is writing the cheques.

If we presume a PI company can be found to accept it, they would have the monopoly over all regulated advisers. Without market competition, PI rates would increase massively. These would include the PI Insurer’s margins – all topped by IPT at 9%. It might be better to stay where we are.

So, what is Libertatem’s answer?

Obviously, as a profession we cannot continue like this. But there is a simple answer. We must realign FOS with the tenets of the civil law. After all, why should clients expect any more than they might receive within the legal process? This will not only stabilise the PI market but would also encourage investors into the advice market.

And then we come to the "one-size-fits all regulator. Unless we can separate professional advisers from the major players, we will continue to be treated as if we have access to client funds.

Ideas such as risk-charging are divisive within the sector and are doomed to fail. A captive PI insurer is just madness to everyone – except the regulator.

Libertatem are making some headway. But, as always, the major issue for us is apathy. Not only in the 90% of advisers who have yet to ally themselves with a trade association, but also in the attitude of many providers who are dependent on the sector for business.

As a profession, we are sleepwalking into extinction. Advisers need to wake quickly and do something about it, before it's too late.