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A reduction in those giving insurance and investment advice would not be in the best interests of consumers.

The Financial Services Compensation Scheme [FSCS] has issued a consultation paper [3 July 2013] on how it should be funded and it has already been suggested that advisers could face higher FSCS levies if the proposed funding model is approved.

The funding of the FSCS presents a complex dilemma for regulators. On one hand, it is clearly vital that the FSCS receives appropriate funding. As the UK’s statutory fund of last resort for customers of financial services firms it has to be fully funded so it can pay compensation to consumers if a financial services firm is unable, or likely to be unable, to pay claims as required. On the other hand, it is not in consumers’ interests if access to advice reduces as a result of costs increasing to a level where adviser firms feel there is no profit in remaining in business. As the FSCS fees are paid by all firms within the financial service industry a reduction in the number of firms will also place a greater burden on those who remain, which could result in an acceleration of advisers leaving the industry.

What are the FSCS proposing?

The central thrust of the proposal is that future fees are based on calculating each year’s levy based on the average of the forthcoming three years’ expected compensation costs. The Financial Services Authority [FSA], as part of its review of the way the FSCS is funded, had previously put forward plans to project potential compensation costs over three years rather and this proposal sees the implementation of that suggestion.

FSCS argues that taking a 36-month view of expected costs allows the FSCS to reduce the volatility of annual levies, reduce the likelihood of interim levies, and give the industry greater certainty. The hope is that by basing the indicative levy on a three year moving average it will smooth fluctuations in annual costs. However, it should be noted that there is a warning message in the consultation document. This suggests that 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. The calculation will take into account the FSCS claims experience and it will be adjusted to take current claims trends and market intelligence. So it seems that the FSCS plans to take the higher of the two calculations! Such a move will not be welcomed by adviser firms.

What will change in terms of funding from different sectors?

It is already predicted that certain sectors will see significant increase in fees. For example, using the current calculation, the levy for 2012/2013 for insurance intermediaries is £52m and using the proposed model the levy would have been almost £70m for that sector. As with any change there will be winners and losers; the important issue is that affected sectors respond to the consultation document.

What next?

By publishing this consultation document the FSCS is setting out the proposed approach and invites responses from the industry and other stakeholders to the paper and in particular to two questions:

  • What are your views of the FSCS’ preferred approach?
  • Are there any other approaches that FSCS should consider?

Feedback on the plans for a three year funding model should reach the FSCS by 31 July 2013.

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