Wealth firms are still losing out under the revamped Financial Services Compensation Scheme (FSCS), chief executives and the Wealth Management Association (WMA) have warned.
Their comments come as the FSCS announced the 2014/15 headline annual levy will be reduced by £37 million to £276 million.
However, wealth management and advisory businesses that fall under the investment intermediaries category will not partake in this good news. Instead, they will have to stump up £112 million for the year – a £7 million increase on earlier estimates.
It is a move that has prompted concerns that the regulator’s changes to the FSCS funding model, which were introduced this March, have not gone far enough to remove the prospect that private client firms could end up overpaying – as some have argued was the case under the old system.
Ian Cornwall, head of regulation at the WMA, pointed out that more than one-third of the £112 million contribution from investment firms (£47 million) will be attributed to compensation payments to consumers affected by the failure of Catalyst Investment Group, including investors outside the UK.
In Cornwall’s view, the collapse of Catalyst highlights a number of fundamental issues with the new funding model. Not least, the fact that consumers can claim in relation to Catalyst’s promotion of unregulated products, while clients offshore can also claim from the UK compensation scheme in relation to the activities of Catalyst.
‘This situation contradicts the Financial Conduct Authority’s design principles for the FSCS, which include durability, resilience, fairness and affordability.
‘The fact that 35% of new claims are effectively made by firms which have never paid into the pot is the illustration that model is unfair, and the FCA fails to take [that] into account.’
This concern is shared by Chris Macdonald (pictured), chief executive officer of Brooks Macdonald, who acknowledged ‘knowing exactly where the FSCS is paid out would be very helpful’.
‘I think the WMA’s point is completely fair, and I couldn’t be any more robust in my endorsement of their statement,’ he said.
‘Everyone in the industry wants to protect investors and the existence of an investor compensation scheme is good for us, but I would completely take the point about protecting investors outside of their jurisdiction.’
While he explained transparency is improving under the new model, Macdonald said more needs to be done regarding how the scheme is allocated and its sum in advance.
The WMA’s view on the mismatch between the allocation of eligible income and compensation charges is reiterated by Colin McInnes, managing partner at Quartet Investment Managers.
While he considers the levy ‘is just the cost of doing business’, he is calling for a higher degree of clarity on how it is being spent.
‘We’d like to know how it has been calculated, and we think it should be a forward-looking number. Are they continuing to see an expectation of payouts? If so, on what basis or how? That would be helpful,’ McInnes said.
While Quartet typically budgets its balance sheet capital on the basis of the previous FSCS bill, plus factors such as inflation, the managing partner said he would appreciate a better knowledge of what his firm ‘would be in for’.
‘[After calculations] we’re not ever right but we’re not a million miles off.’