"I believe that radical reform of the FSCS is critically important to the future of the advice sector and needs to be addressed for the benefit of every adviser who is operating in the market today,"
The paper entitled ‘Funding the Financial Services Compensation Scheme’, has been submitted to the FCA’s FSCS review team.
In it, Davy says that individually advisers have relatively few complaints and that "even in the extreme", it is unlikely that the cost of settling an upheld complaint will exceed £5,000.
Therefore, Davy says that "even quite small advisory firms are being charged thousands of pounds per year to fund the FSCS caused by firms whose advice has been careless, reckless or dishonest and who have subsequently gone out of business".
Davy continues: "In addition, many of the liabilities which have fallen on the FSCS have been a result of product failures and/or corporate fraud, rather than bad advice - Keydata and Arch cru, being high profile examples of regulated providers promoting regulated products which failed. Despite this, the bulk of the FSCS liabilities have continued to fall on the advice sector."
Davy adds that in addition to the levy being unfair it is also an "economically unsound model" as it puts the cost of funding the FSCS onto the smallest and financially weakest in the sector and therefore on those least able to absorb it.
He says that while a move to a more risk based levy may have some part to play in a solution, "it does not address the fundamental unfairness of the present funding method".
Davy believes it is "inconceivable that a risk based levy could be set high enough to prevent those who, as ‘problem firms’, are careless, reckless or dishonest, from behaving as they do".
He adds that "whilst some high risk areas can be identified in advance, others only emerge with the benefit of hindsight".
As a solution, he says that clients could pay directly for the protection they enjoy under the FSCS via a product levy, which he says would be the fairest option but appears to have been ruled out at an early stage of the review.
If a product levy is rejected, Simplybiz believes it is essential that product providers become the primary funding source of the FSCS where its impact on any individual provider would be insignificant.
Discussing the paper, Ken Davy said: “As you may know, over the course of the past few months I have spoken at many events and written several articles about the manner through which the Financial Services Compensation Scheme is currently funded; a system which I believe to be grotesquely unjust.
I have today submitted a paper to the FCA’s FSCS review team highlighting the deep flaws within the current method of funding the Scheme and a solution which I believe would not only be more fair but would also increase market stability and create a broader collection base to shoulder the financial burden of funding the Scheme. I believe that radical reform of the FSCS is critically important to the future of the advice sector and needs to be addressed for the benefit of every adviser who is operating in the market today, providing an invaluable service to their clients.”
