To make the FSCS fairer to ‘good’ firms, we have also recommended fines generated from ‘bad actors’ go towards the funding of the FSCS, before charges are levied to the industry.
RT: How do you think these solutions might impact the financial advice community?
PC: I think the financial advice community would be very receptive to the FCA harnessing the industry and accessing their help in supervising the marketplace. In terms of using fines to fund the FSCS – and reducing levies – the advice community would of course love that. The Treasury – on the other hand – might not though. Therefore, although this would be the fair and right thing to do – this might not get the endorsement required.
In regards to firms being required to keep regulatory capital on deposit, that might be trickier, as it increases the barriers to entry for a new advice business wanting to set up. It would make it harder for new advice businesses to raise capital. Therefore, this solution would definitely favour the bigger more established firms. Nevertheless, although it’s potentially a bit more controversial, it does seem fair – and we, at TISA, feel that a debate needs to be had on this proposal.
While it is important to consider the impact on the financial advice community, I think it is crucial that I, again, mention the unadvised – as only 4 million people in the UK actually receive financial advice on an ongoing basis. In their Discussion Paper, the FCA was talking about potentially reducing the scope of the FSCS – excluding some high-risk, high-volatile investment products, for example. We are in favour of this approach because if consumers are losing money on products that are very high risk – these products arguably shouldn’t be in the realm of the FSCS.
In addition, removing certain high-risk investment products from the scope of the FSCS might steer consumers towards safer, mainstream investments. Far too many, especially amongst the unadvised, are choosing high risk investments, like cryptocurrency and using trading platforms without an understanding of what they stand to lose. We feel that in the long-term, this is just not in consumers’ best interests. Hopefully changes to the FSCS can also support consumers by directing them to safer mainstream investments.
RT: Any final thoughts on how to address the shortcomings of the FSCS?
PC: It is worth the FCA looking at inefficiencies in how Professional Indemnity insurance cover works for the industry and why more losses aren’t covered by PI insurances as opposed to the FSCS. Although pay-out should come from firms and their PI insurers, the feedback we are getting from our members is that there are so many exclusions to PI cover that firms are simply unable to rely on it. A big part of the issue is that when a complaint goes to the ombudsman, PI insurers assume significant risk and uncertainty with respect to Financial Ombudsman (FOS) judgements – for example, regarding whether the ombudsman will make judgements following the FCA’s set of principles or not. Hopefully, we will be able to get the regulator, ombudsman, and industry to work together and ensure that PI cover is robust for firms and can be relied upon by consumers.
