"Aside from the direct harm this causes consumers, this tarnishes the financial advice and wealth management sector as a whole and creates an additional financial burden on well-run prudent firms."
PIMFA says "every individual that has sought compensation through the FSCS has already suffered a poor outcome". PIMFA has consistently argued that policy should be designed to minimise the need for the compensation scheme and protect consumers before the harm occurs - rather than allowing harm to occur and relying on the FSCS as a safety net.
In its latest policy paper, PIMFA argues that without a wholesale review of the fundamental drivers of calls on the FSCS, the total compensation bill will continue to rise for all advisers and wealth managers regardless of any review of the levy’s construction.
PIMFA has identified three-interconnected issues which it say "ultimately lead to consumer harm". Firstly, it argues there is an "inadequacy" of supervision and regulation which fails to protect customers from unregulated products and contributes to customers requiring the FSCS.
Secondly, it believes the FCA’s regulatory approach incentivises some firms to fold their company to deliberately transfer risk to the FSCS.
Thirdly, it says the FSCS' structure is "unable to take account of the risk that any given firm presents to the market".
PIMFA says the "existence of a levy which continues to incentivise poor outcomes for savers and the profession, is something which clearly needs review".
The association now wants the FCA to review levy construction and consider a risk-based element and how to boost recovery from the original firm or product.
It also wants the government to review the drivers of FSCS levy costs and identify ways of legally limiting firms ability to transfer risk onto FSCS in future.
Liz Field, chief executive of PIMFA, commented: “PIMFA and our members firms are fully committed to ensuring that consumers are protected via the FSCS.
“However, the current environment allows some firms that simply should not be in business, to transfer their responsibilities to compensate their clients onto the rest of the industry through the practice of phoenixing. Lifeboating is also a key challenge.
“Aside from the direct harm this causes consumers, this tarnishes the financial advice and wealth management sector as a whole and creates an additional financial burden on well-run prudent firms. Firms need to continue to invest in their innovation and this is impacted by the exponential rise in FSCS fees.
“We are aware that this is a complex issue and, as a result, there is no single cure that will provide a solution. But we urge the Government and the FCA to work with us in order to ensure that the FSCS and the regulatory structures can more effectively protect against harm, ensure the advice gap doesn’t further widen, and provide confidence to both consumers and the firms which fund it.”