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IFAs attack regulator’s reforms to FSCS funding

by Michelle Abrego on Jan 21, 2013 at 09:45

IFAs attack regulator’s reforms to FSCS funding

Advisers have hit out at the Financial Services Authority’s (FSA) reforms to the way the Financial Services Compensation Scheme (FSCS) is funded, claiming they will push firms out of business and lead to increased client costs.

The FSA confirmed plans to raise the investment intermediary claim threshold from £100 million to £150 million, rejecting plans for prefunding or a product levy.

In its cost-benefit analysis of the reforms, the regulator said that when combined with the possibility of 10% of IFAs retiring due to the retail distribution review, funding the £150 million threshold could account for up to 30% of the remaining advisers’ revenue.

Chris Petrie (pictured), director of Northampton-based Christopher Charles Financial Services, said firms would struggle to stay in business if IFAs had to fund the full £150 million.

‘At that point the system will break because so many firms will pull out of the market,’ he said. ‘Then it will become maybe 60% to 70% of someone else’s turnover. It will just self-implode.’

Emma Ames (pictured below), co-director of Exeter-based Cathedral Financial Management, said the firm had already raised clients’ ongoing fees to cover FSCS levies. ‘It doesn’t matter how many people shout [the FSA] does what it wants,’ she said. ‘It is worrying that it makes things even more difficult.’

Paul Richardson, managing director of Concept Financial Planning in Reigate, said the outcome was disappointing for IFAs but worse for consumers.

‘I have to pay the bill, but ultimately I am not paying the price,’ he said.

9 comments so far. Why not have your say?


Jan 21, 2013 at 10:48

Typical Regulator. Start out with the intended outcome and work the research backwards to justify their position. When all advisers start to explain to investors the reason for the increase in costs is the extra cost of regulation, it will at least ensure the investors understand the FSA, the FSCS and the FOS are not free but extremely expensive elements of the whole system intended to protect the consumer as they have done so successfully in the past.

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Mike Fenwick

Jan 21, 2013 at 10:54

It is now coming up for 30 years since I wrote an article in another trade paper which contained these words:

" Failure to obtain the necessary authorisation is not solely based on an objective assessment of what is right or wrong, nor indeed of what is deemed criminal. The criteria which may dictate whether you are guilty of a potential criminal act may not be the commission of such an act. The over-riding criteria may be your ability to adhere to a set of subjectively assessed rules and, even more significantly, your ability to absorb the running costs involved in enforcing such rules. Ignore honesty! It may be the rules and costs which prove to be your prison."

"It is also a recipe for disaster. Simple arithmetic is all that is required to produce "criminals out of the hat".

"Take any drop in the number of intermediaries to be regulated, add any increased regulation costs and multiply by a call on the compensation fund and they equal an immediate cost increase. Any such costs are uncontrollable and there is no compensating price increase. An inability on the part of an intermediary to absorb totally all such costs becomes a potential criminal offence. You do not have to commit an offence, it can just happen to you."

It therefore comes as little surprise to me to read the above article.

My original article came after meetings with Prof James Gower, who drew the first blueprint for financial regulation, and in doing so instigated a generic mistake which has been carried forward to this day.

In essence that mistake is to attempt to regulate a market, whether for product or advice, without using the ingredients, and the forces of the market itself - namely the ability to assess and price risk.

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Jan 21, 2013 at 11:09

What's the problem?

No IFAs, no advice

No advice, no miss selling

No miss selling, no compensation

No compensation, no FSCS

Job done

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alec hargreaves

Jan 21, 2013 at 11:17

Would be nice if the above included NO FSA too!! This Government is 100% to blame for the FSA's continuance in business irrespective of its folly. They have been given greater powers than the government with seemingly no redress irrespective of how damaging and stupid their decisions.

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Gerry Cooper

Jan 21, 2013 at 11:37

It really does confirm, if it were needed, that the Regulator has a very limited understanding of the businesses it is charged with regulating.

Consider too that the bulk of the recent FSCS claims are related to products which a large majority of IFAs would and did view with a high degree of scepticism, and that in many cases, these doubts and concerns were pointed out to the Regulator, privately and publicly, but who declined to act or investigate the concerns.

So again, the small firm and, as Emma points out, their clients, pay the price for regulatory inertia and incompetence.

Interesting and instructive contribution from Mike Fenwick. Sadly for me, I think I remember reading his pieces all those years ago.

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Lyndon Edwards

Jan 21, 2013 at 11:57

Why not simplify matters by combining the FOS and FSCS into one and having one compensation limit regardless of whether a firm is in business or not. At the same time impose a longstop for claims, and underwrite the lot through a single levy, matched 50/50 from all providers?

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Mike Fenwick

Jan 21, 2013 at 12:37

In using an article from 1987, I did so for two reasons, firstly to demonstrate that what may be the subject of complaint today has been patently obvious from the outset, and secondly to illustrate what for me is the ultimate frustration, namely that in that period of nearly 30 years, IFAs have failed to demonstrate and offer to the public a viable and realistic alternative to what politicians and regulators have devised in the form of the FSCS.

Try this as an opening thought:

I could use Comet, or Jessops, but HMV and Amazon are the better choice.

Let us say, in the run up to Xmas 2012, a client of yours asked for your advice on the purchase of gift vouchers, citing the deals from HMV or Amazon, but expressing the worry that HMV appeared from the press to be less secure financially.

"Don't worry" you reply " the politicians and regulators have set in place a fund of last resort, it will compensate you no matter what, if HMV or indeed any other retailer, yes, any retailer in the UK, goes bust, you don't have a care in the world, all the other retailers will be asked to pay for all the losses involved! It's a brilliant concept, you have no risk whatsoever, buy what you like, where you like, from whoever you like, whenever you like!

That idiocy is what politicians and regulators devised in the '80's for financial services and have continued to date, and IFAs and the financial markets have imho sadly accepted it as the only game in town, and you can take that idiocy a stage further when viewing the taxpayer bail out of the Banks, it's based on the same logic.

Second thought:

The reason I chose HMV and Amazon is to illustrate how markets change, how old methods fail, and new practices evolve, how what is known as "creative destruction" in many ways defines and underpins a market economy, not a regulatory system which offers a cast iron guarantee that you can never lose - and therefore promotes to the public an understanding that considering any risks they might face is a waste of time and energy - isn't that what a renewed FSCS advertising campaign is about to tell the public?

Third thought:

After nearly thirty years, and pages and posts of complaint in every one of those years about the current system, isn't about time, some IFAs put their heads together and demonstrated some "creative destruction" of their own, and offered a viable and realistic alternative?

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Lyndon Edwards

Jan 21, 2013 at 15:52

QED, Mike?

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Mike Fenwick

Jan 21, 2013 at 17:08

@ Lyndon Edwards

Very very fair question ... am I just mouthing off, or intent on opening discussions that may lead to an alternative?

You have my assurance it is not just mouthing off, that's all too easy on this subject, I wouldn't have posted if that was all it was. I have already opened discussions with some who may be interested.

QED? Very far from it, will those discussions lead anywhere, I don't know, but nothing ventured, nothing gained.

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