Who Pays For the FSCS Reforms, Asks Gill Cardy?
This article was first published in July 2013
That the Financial Services Compensation Scheme needs reform is beyond question. That there have been persistent calls for reform to FSCS is beyond question. That the regulator fails to understand why it needs reform is also beyond question.
Sadly, while the FSCS ‘only’ implements the rules created for it by the FCA, it can simply say: “We just do what we’re told”. But that’s bluster. Of course there’s a close relationship between FSCS and FCA – and if FSCS really wanted things to change, the channels do exist to make its views known.
But the latest suggestions for reforming the calculation of the levies do offer us a tiny glimmer of light at the end of an exceptionally long tunnel. Now, at last, we can begin to believe that the various individuals and organisations who most need to be persuaded of the need for change are beginning to understand that change must come. And the sooner the better.
36 Month Rolling Period
Following the publication of the revised levy calculation method, which uses rolling 36-month periods, attention has focused on the fact that this three-year averaging method would result in a higher levy for advisers.
Well, of course it would. Any system that predicts the car-crashes heading our way in the next three years is not going to result in the first year’s levy on a three-year average being lower, is it?
But the whole point of this change, and the minor triumph that it represents, is that we finally see the acknowledgement that, for the smallest of small businesses – namely the vast majority of adviser firms – cashflow is critical.
At present, firms are having to keep exceptional levels of cash in reserve, way above normal cashflow and capital adequacy requirements. The real cost of this reserving is to hold back investment in recruitment, training and systems – which, in turn, collectively holds back the entire adviser sector at a time when it ought to be capitalising on post-RDR opportunities.
So the effect of the FSCS being allowed to take this longer 36 month view, and to provide greater stability in its calculations and invoicing, will be to create a higher initial invoice, followed by fewer (or preferably no) interim levies.
Unfortunately, overall bills will still remain inappropriately high. The number of firms will reduce, increasing the liability on the others. Remember, ‘Phoenixing’ and leaving your liabilities behind remains a strategy which, in spite of protestations to the contrary, the FCA still shows no desire to block.
Finally, as long as the FCA continues to make advisers (whether ‘good’ or ‘bad’) pay for product providers’ failings, liabilities will always end up on advisers’ doormats.
We need to recognise that any FSCS funding reform will result in higher bills for adviser firms in the short term. If we want change, and we all do, there will be a painful period in which good quality firms who aim to prosper in the post-RDR world of increased transparency and professionalism will have to bite the bullet.
They will have to pay for the old system, where good surviving firms pay for the failings of their departed peers, at the same time as funding an improved system which makes departed firms pay for their own failings.