The urgent need for FSCS reform – “No, it’s still not fine!”

In April 2020, I penned the blog below about how the fines that the Financial Conduct Authority (FCA) issue could be used to reduce the monetary impact of the annual Financial Services Compensation Scheme (FSCS) levy on financial advisers, rather than being paid over to HM Treasury.

In essence, the prevailing system meant ‘the good guys’ were paying for the misdemeanours of ‘the bad guys’.

Four years later, the sentiments outlined in this blog sadly remain as pertinent today.

As the new year dawned, the FCA announced it had imposed fines totalling nearly £53m during 2023, while the FSCS announced that its levy would increase by £145m to £415m in 2024/25. 

This meant that advisers could face a near 40% rise in their levy to £140.4m (compared to a figure of £101.1m for 2023/24).

In response to this announcement, Simon Harrington, head of public affairs at the adviser trade body, the Personal Investment Management & Financial Advice Association (PIMFA), said that while the protection that the FSCS “remains a fundamental part of the financial services landscape”, it was also a “significant financial burden and barrier to growth for firms”.

Echoing the thoughts of my earlier blog, Mr Harrington continued, “it remains the case that it is an uncontrolled cost to firms and penalises well-run firms for the failures of others,” and that “we remain of the view…that FCA fines [should] be used to subsidise the FSCS levy, rather than being directed towards the Exchequer.” 

“This would represent a much fairer system and truly represent a ‘polluter pays’ model the entire financial services industry agrees on…[ensuring]…consumers get the protection they need whilst lifting a considerable burden on firms."

I sincerely hope that, in four years’ time, I am not having to revisit this topic again.

Original blog published April 2020

During the first few weeks of 2020, yet more Financial Services Compensation Scheme (FSCS) levy demands began to land on financial advisers’ doormats.

The payments required were – in many cases – significant, with advisers given just one month to pay, regardless of their cashflow position.

In mid February an adviser poll asked, “Should the system for funding the FSCS be completely reformed?” The result? 82% of respondents said “yes.” Personally, I’m surprised that the figure wasn’t higher

One article argued that, “the current FSCS funding model, which is reliant on cross subsidy between firms, puts a large and unpredictable burden on well-run firms.” Instead, “a pre-funded compensation scheme would mean failed firms would share the cost of protecting consumers.”

Despite its contemporary sentiments, that article was actually written back in June 2011 and serves to demonstrate the absence of evolution in the FSCS funding model during the last nine years, other than increasing the number of levy payers to include pension providers. (For more information, pleaser refer to our article 'Reforms to the FSCS are set to cost you'.)

Another article has suggested that the Covid-19 pandemic is the Financial Conduct Authority's (FCA's) chance to resolve the funding issue, highlighting the need to focus on rebuilding business rather than the FSCS levy.*

Funding the FSCS – is it fair?

There is the pervasive question of why should the ‘good guys’ pay for the ‘bad guys’? This has increased in its intensity, following this latest round of supplementary levy demands.

After being landed with a bill for £4,500, a London based adviser had had enough and wrote to his MP asking for parliamentary attention to be given to the increasing levy. This gained traction via Twitter and resulted in the Personal Finance Society (PFS) spearheading a campaign to reform the levy, under the heading 'The good guys shouldn’t pay'.

Within a week, nearly 3,000 PFS members had downloaded their template document, providing advice on how to engage with their local MP on the matter. All this against a backdrop of an overall levy of £635m for 2020/21, of which advisers would have to pay £213m (an increase of 13% on the previous year).

A consensus for greater fairness

In order to make the levy fairer, a consensus emerged around the concept of a risk-based levy, to solve the dichotomy whereby the highest risk firms pay the least and the lowest risk firms pay the most.

For their part, the PFS pointed to the Financial Advice Market Review in 2016, which found that, “the unpredictable nature of the FSCS levy makes it hard (for firms) to plan effectively.”

Their solution is that compensation is funded both by the market and by a levy on the £9 trillion of retail assets managed by the UK investment industry.

So, with all of these letters winging their way to numerous MPs across the country, (with some of them new to parliament following the general election and, no doubt, keen to ‘make their mark’), what reception did they get?

Who should fund the FSCS?

Responding to Nickie Aitken MP, Economic Secretary to the Treasury, John Glen, told parliament during Treasury Questions that the Government has no role in setting the FSCS levy. This is because the FSCS is not a governmental body and so the levy is not a government issue.

In bowling away this particular ‘hot potato’ from parliament as quickly as possible, Glen went on to say that the FSCS, “…carries out its compensation function within rules set by the FCA and PRA, who are independent from government.”

Yet two other occurrences during February may serve to point to another potential solution to funding the levy.

1. The “bad boys” essentially fund the FSCS altogether.

Firstly, former FCA employee Rory Percival weighed in with a powerful riposte to John Glen’s “nothing to do with me, Guv” claim. In stating that there has been a ‘misunderstanding’ about responsibilities, Percival went on to say, “…the FCA decide which sector pays what to FSCS. The government decides whether FSCS is paid for by financial services firms or by other means such as product levy, fines, or taxation.”

There is one word within Percival’s quote above, which is pertinent to the second occurrence.

2. The FSCS is paid for by fines

During a speech in February, the FCA executive director of enforcement and market oversight, Mark Steward, revealed that the regulator imposed financial penalties and fines totaling more than £310m during 2019.

According to Steward, most of these fines were for “serious breaches of the General Principles” and that “…this is consistent with our aim to deal not only with serious misconduct but also ensure its consequences are addressed. I cannot reiterate how important this is.”

£310m is a lot of money and, according to Percival, it is within the government’s remit to use fines to fund the FSCS. If all of the fines that the FCA receive were to be used to pre-fund the FSCS levy then, as well as the ‘bad boys’ wholly funding the compensation lifeboat, the ‘good guys’ would not then be faced with more unwelcome bills landing on their doormat.

With current events in mind, there has never been a more important time for people to get advice, and for advisers to be financially able to provide that advice.

Now is the time, therefore, to press the Treasury and MPs to sort out the dysfunctional and unfair funding of the FSCS levy, once and for all.

For more information about any of the topics discussed, please contact your usual Barnett Waddingham consultant or get in touch here.

James Jones-Tinsley is the Self-Invested Pensions Technical Specialist for Barnett Waddingham LLP

*‘Covid-19 pandemic is FCA's chance to resolve FSCS funding issues'