FSCS funding model fails to address ‘untenable’ adviser costs


Advisers say the Financial Services Compensation Scheme’s proposal to calculate levies over three years is being distorted by Keydata and fails to tackle “untenable” adviser costs.

From April 2014, the FSCS will raise levies based on either the compensation costs expected in the 12 months following the date of the levy; or one third of the compensation costs expected in the 36 months following the levy, whichever is higher.

In a paper setting out its approach last week, the FSCS has worked-up models of how levies would be calculated under the new three-year model. These suggest investment advisers would have been hit with the maximum levy of £150m for 2013/14, instead of the £78m actually levied on them under the current model.

The FSA first put forward plans to project potential compensation costs over three years rather than one last July, as part of its review of the way the FSCS is funded.

The review has already seen the annual claims limit for investment advisers rise from £100m to £150m, and the creation of a “retail pool” which would be triggered if one class breaches its annual claims limit.

The FSCS plans to use a five step process to determine levies based on compensation costs forecast for the next three years: assess the average costs in each class over the last three years; adjust for exceptional costs that are not expected to reoccur; add costs of expected defaults in the next three years; factor in new claims trends; and account for any surplus or deficit for each class.

The FSCS has not stripped out the cost of Keydata claims in its models showing average FSCS costs paid by each class over the last three years, saying although the cost of compensating Keydata investors was high, they are not “beyond the usual level of costs” met by the investment intermediation class.

But Apfa has challenged this view, arguing compensation levies under the three year model should be adjusted to exclude Keydata costs.

Director general Chris Hannant says: “We would argue a breach of the class threshold, which has only happened once in the FSCS’s history, is exceptional, and the effect it has on the numbers could be significant.

“By taking its proposed approach, the FSCS is distorting the calculations and risks making levies more volatile and leaving firms out of pocket. We urge the FSCS to look again at its approach, and reconsider the criteria it will use to determine exceptional factors.”

In 2011 the industry was hit with a £326m FSCS interim levy, with Keydata accounting for £258.8m in claims. Of the total interim levy advisers had to pay £93m while fund managers paid £233m.

Atkinson Bolton Consulting director Simon Gibson says: “I would argue the Keydata costs are exceptional. Just because a major collapse has happened once, this does not necessarily mean it will happen in the immediate future.

“I am all for consumer compensation, but the key is it has to be appropriate. With increasing regulation, there is the potential for the level of FSCS claims, and therefore the costs on advisers, to get worse rather than better.”

Pilot Financial Planning director Ian Thomas says: “The fundamental issue is not three-year versus one-year, but the way firms are categorised. Investment providers and stockbrokers continue to be thrown in the same class as smaller financial advisers, which just makes FSCS costs untenable.

“You almost feel powerless when you see these kind of proposals, because it is hard to see how I can change what is happening.”