Reforms to the FSCS are set to cost you

Estimated reading time: 3 minutes

Picture someone mopping up water from the floor...

As you watch, you notice that - despite all the mopping - the water is not receding. Your view expands. There is a sink: the tap is wide open, the plug firmly planted in the plughole and water is cascading freely over the edge. The supervisor enters the room and you sense that he’s seen this before; that this mopping operation has been going on for a long time. Suddenly his face changes and before he even opens his mouth, you know he’s had an idea: “I know! What we need is more people with more mops!”

It might surprise you that this is a surprisingly good metaphor for a consultation that closes on 31 January on the funding of the Financial Services Compensation Scheme (FSCS). Any amusement you might have felt will evaporate when I tell you that the person who is going to pay for more people with more mops is you.

For years, the FSCS has been making hefty levies on financial advisers to compensate people after the fallout of what are essentially investment scams. The levies fall on those remaining in the industry – in other words, those not to blame for the scam in question – and so the good are rinsed to clean up after the bad. The money to pay FSCS levies (and related costs like compliance and private indemnity insurance) doesn’t appear out of thin air: the cost of advice to clients has inevitably increased, even as the rotten apples have undermined the reputation of advisers in general. That hints at another hidden cost. For example, we understand that if medical practitioners who deliberately harm their patients were to put the public in general off seeking medical advice, the health of the nation would suffer. The same applies to financial advice and the financial health of the nation.

Scams leading to FSCS bailouts of consumer victims are often reported in the media as “SIPP scams”, which providers find a grating injustice. It is rather like blaming the likes of BT and Vodafone for cold calling – yes, the cold callers are using telephones but the operators are not part of the problem. Modern day Willie Suttons tend to target SIPPs (and SSASs) “because that’s where the money is” – a working lifetime of pension saving, boosted by tax relief. Like the banks that Willie Sutton was referring to, pension providers need to have security measures; we have technical, investment and compliance teams with a barrage of checks and tests to spot potential problems – but there are limits to what they can reasonably do.

The way that each scam works varies, but a common scenario has been a toxic combination of unregulated firms that run and market unregulated investments with regulated advice firms. These firms provide an apparently respectable and trustworthy facade, often with the same people owning and running all the firms involved. Whatever the method used for the scam, the reason people keep perpetrating them is because they think they can get away with them.

Having reached a point where the FSCS appears concerned about drawing any more money off advisers, the Financial Conduct Authority (FCA) is proposing in its CP17/36 consultation paper on the funding of the FSCS to start drawing money off pension providers too.

This is pure folly. The situation will never profoundly improve until we get to the source of the problem. We don’t need more people with more mops. We need a well-thought-out cold-calling ban that dovetails with all other anti-fraud efforts. We needed it years ago but we’ll settle for having it now. We need more policing (especially preventative), so that rules are enforced and the sense of impunity is dispelled. We need the proceeds of crime to be tracked down, recovered and used to compensate victims rather than creating secondary victims in the form of honest advisers and providers.